Sugarfine Sdn Bhd (Sugarfine) plans to acquire two new machines amounted to RM500,000 each. It is expected that the new machines will increase the companys productivity as well as its working capital. The company estimates that the working capital will increase by RM500,000. 20% of the working capital is considered to be permanent. Sugarfine intends to apply for 50% long-term financing and 50% shortterm financing to fund the purchase of these machines as well as to fulfill the requirements of the additional working capital.

Required:

i. Determine the financing policy that will be adopted by Sugarfine. (Support your answer with workings).

ii. Analyse the risk and return trade-off for the financing policy adopted in (i) above.

iii. Illustrates a graph for the financing policy selected in (i) above.