1. **Problem Statement:** Delima Holdings Bhd. needs RM950,000 for 8 months and is considering four financing alternatives. We need to calculate the Effective Interest Rate (EIR) for each and determine the best option. 2. **Formula for Effective Interest Rate (EIR):** For discounted loans: $$EIR = \frac{Discount}{Net Proceeds} \times \frac{360}{Days}$$ For loans with fees and interest: Calculate total cost and divide by net proceeds, annualized. 3. **Alternative 1: Discounted Loan** - Quoted annual rate = 6.2% - Loan amount = RM950,000 - Period = 8 months = $$\frac{8}{12} \times 360 = 240$$ days - Discount = $$950,000 \times 6.2\% \times \frac{240}{360} = 950,000 \times 0.062 \times \frac{2}{3} = 39,333.33$$ - Net proceeds = $$950,000 - 39,333.33 = 910,666.67$$ - EIR = $$\frac{39,333.33}{910,666.67} \times \frac{360}{240} = 0.0432 \times 1.5 = 0.0648 = 6.48\%$$ 4. **Alternative 2: Commercial Paper** - Face value per paper = RM50,000 - Issuance cost per paper = RM3,000 - Number of papers = $$\frac{950,000}{50,000} = 19$$ - Total issuance cost = $$19 \times 3,000 = 57,000$$ - Total proceeds = $$950,000 - 57,000 = 893,000$$ - Interest = $$950,000 \times 8\% \times \frac{8}{12} = 950,000 \times 0.08 \times \frac{2}{3} = 50,666.67$$ - Total cost = Interest + Issuance cost = $$50,666.67 + 57,000 = 107,666.67$$ - EIR = $$\frac{107,666.67}{893,000} \times \frac{360}{240} = 0.1205 \times 1.5 = 0.1808 = 18.08\%$$ 5. **Alternative 3: Line of Credit with Commitment Fee** - Credit line = RM1,000,000 - Amount borrowed = RM950,000 - Unused portion = $$1,000,000 - 950,000 = 50,000$$ - Commitment fee = $$50,000 \times 3\% \times \frac{8}{12} = 50,000 \times 0.03 \times \frac{2}{3} = 1,000$$ - Interest = $$950,000 \times 11\% \times \frac{8}{12} = 950,000 \times 0.11 \times \frac{2}{3} = 69,666.67$$ - Total cost = Interest + Commitment fee = $$69,666.67 + 1,000 = 70,666.67$$ - EIR = $$\frac{70,666.67}{950,000} \times \frac{360}{240} = 0.0744 \times 1.5 = 0.1116 = 11.16\%$$ 6. **Alternative 4: Revolving Credit Line** - Credit line = RM1,500,000 - Amount borrowed = RM950,000 - Unused portion = $$1,500,000 - 950,000 = 550,000$$ - Commitment fee = $$550,000 \times 5\% \times \frac{8}{12} = 550,000 \times 0.05 \times \frac{2}{3} = 18,333.33$$ - Interest = $$950,000 \times 7\% \times \frac{8}{12} = 950,000 \times 0.07 \times \frac{2}{3} = 44,333.33$$ - Total cost = Interest + Commitment fee = $$44,333.33 + 18,333.33 = 62,666.66$$ - EIR = $$\frac{62,666.66}{950,000} \times \frac{360}{240} = 0.06596 \times 1.5 = 0.09894 = 9.89\%$$ 7. **Best Alternative:** - Alternative 1: 6.48% - Alternative 2: 18.08% - Alternative 3: 11.16% - Alternative 4: 9.89% The lowest EIR is Alternative 1 (6.48%), so it is the best financing option. 8. **Part b: Two types of non-spontaneous short-term financing:** - **Bank Loans:** Funds borrowed from banks for short periods, usually with interest and fees. - **Trade Credit:** Credit extended by suppliers allowing delayed payment for goods or services.