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Hi Tutor ,
Could you please check if the answer below is sufficient in relation to question( P4 Article – International project appraisal – Part 2 – Penn Co )
ALTERNATIVE SOURCES OF FINANCE
The chief financial officer (CFO) of Penn Co has concerns about the substantial initial investment required to start the project, relative to Penn Co’s market value. The company’s financial advisers agree with the CFO and are suggesting two alternative methods of raising the funds.€1,000m five-year 6.25% syndicated bank loan – Penn Co’s advisers believe that a number of Nurukian banks would be willing to participate in such a transaction. They also believe that they may be able to persuade the Nuruk government to provide a subsidised interest rate of 4% pa on an element of this loan.
To raise the required funds using Islamic finance in the form of sukuk bonds. The advisers feel that the project’s characteristics are within the Sharia law regulations and this would give Penn Co access to low cost finance.
(ii) The key differences that Penn Co should be aware of between raising money via the Islamic finance option as opposed to traditional forms of debt capital. (6 marks)
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ANSWERThe main difference between islamic finance and conventional debt financing is that payment of interest or riba is not allowed under sharia law.
Suku Finance – In this type of financing the finance provider has ownership over the real assets and the earnings generated from the assets is used to pay the return.
This type of finance can be asset based or asset backed.
Asset based – The principal is covered by capital value of the assets,but the returns and repayments to sukuk holders are not financed by these assets directly ,whereas in asset backed the returns and re payments are financed directly by the asset .
In case of final phase project Penn co could use the suku finance to fund the investment required .It is OK, but you need to be more specific to the situation outlined in the question.
You need to suggest what assets the finance provider might have ownership of.
I do not have the original question and so it is a bit difficult.
I think I am correct in saying that it is a railway company of some sort – in which case you can suggest the assets that the sukuk bond could be backed by (the track maybe?)
Its also worth mentioning that the business is not involved in gambling, alcohol etc., and so that will not stop it getting finance.
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