MKM Resources Berhad requires RM500,000 to support the working capital requirements for the next 9 months. There are several alternatives of financing the as below:

 

i) Borrow from WVE Bank and pays annual interest rate at 9 percent on a discounted basis. The bank requires a 10 percent compensating balance. A company currentlymaintains a demand deposit of RM30,000 in the bank.

 

ii) Issue commercial paper at an interest rate of 10 percent per annum. Dealer placement fee is RM2,000 per paper and the par value of these commercial paper are RM25,000 each.

 

Calculate the effective costs of the alternatives.