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):** $$\text{EIR} = \left(\frac{\text{Interest Paid}}{\text{Net Proceeds}}\right) \times \frac{360}{\text{Days Borrowed}}$$ 3. **Alternative 1: Discounted Loan** - Quoted annual rate = 6.2% - Loan amount = RM950,000 - Loan period = 8 months = $\frac{8}{12} \times 360 = 240$ days - Interest = $950,000 \times 6.2\% \times \frac{240}{360} = 950,000 \times 0.062 \times \frac{2}{3} = 39,333.33$ - Net proceeds = Loan amount - Interest = $950,000 - 39,333.33 = 910,666.67$ - 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 = $950,000 \times 8\% \times \frac{240}{360} = 950,000 \times 0.08 \times \frac{2}{3} = 50,666.67$ - EIR = $\frac{50,666.67}{893,000} \times \frac{360}{240} = 0.0567 \times 1.5 = 0.085 = 8.5\%$ 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 = 3% annually on unused portion - Interest rate = 11% annually - Interest cost = $950,000 \times 11\% \times \frac{240}{360} = 950,000 \times 0.11 \times \frac{2}{3} = 69,666.67$ - Commitment fee = $50,000 \times 3\% \times \frac{240}{360} = 50,000 \times 0.03 \times \frac{2}{3} = 1,000$ - Total cost = $69,666.67 + 1,000 = 70,666.67$ - 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 = 5% annually on unused portion - Interest rate = 7% annually - Interest cost = $950,000 \times 7\% \times \frac{240}{360} = 950,000 \times 0.07 \times \frac{2}{3} = 44,333.33$ - Commitment fee = $550,000 \times 5\% \times \frac{240}{360} = 550,000 \times 0.05 \times \frac{2}{3} = 22,000$ - Total cost = $44,333.33 + 22,000 = 66,333.33$ - EIR = $\frac{66,333.33}{950,000} \times \frac{360}{240} = 0.0698 \times 1.5 = 0.1047 = 10.47\%$ 7. **Best Alternative:** - Alternative 1 has the lowest EIR at 6.48%, making it the most cost-effective 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 repayment terms. - **Commercial Paper:** Unsecured promissory notes issued by companies to raise short-term funds at a discount. Final answers: - EIRs: Alt 1 = 6.48%, Alt 2 = 8.5%, Alt 3 = 11.16%, Alt 4 = 10.47% - Best option: Alternative 1