Neethal Ltd.is a construction company.The company has evaluated a major development project requiring an investment of $10,000,000.The company has insufficient capital and requires a capital injection of $4,000,000.The company therefore approaches an Islamic bank.The bank decides to buy the materials required and resell it to the firm on credit with a 15 per cent mark up price.You should calculate the cost of capital to the firm,and explain what the bank's risk is in this case and how you could minimize that risk exposure?
Would it make any difference if the company,borrowed the amount from a conventional bank?
Justify your answer assuming the conventional bank interest rate is 15 per cent.

Question

Neethal Ltd.is a construction company.The company has evaluated a major development project requiring an investment of $10,000,000.The company has insufficient capital and requires a capital injection of $4,000,000.The company therefore approaches an Islamic bank.The bank decides to buy the materials required and resell it to the firm on credit with a 15 per cent mark up price.You should calculate the cost of capital to the firm,and explain what the bank's risk is in this case and how you could minimize that risk exposure?
 Would it make any difference if the company,borrowed the amount from a conventional bank?
 Justify your answer assuming the conventional bank interest rate is 15 per cent.

Quizplus · Accepted Answer

The Answer of Neethal Ltd.is a construction company.The company has evaluated a major development project requiring an investment of $10,000,000.The company has insufficient capital and requires a capital injection of $4,000,000.The company therefore approaches an Islamic bank.The bank decides to buy the materials required and resell it to the firm on credit with a 15 per cent mark up price.You should calculate the cost of capital to the firm,and explain what the bank's risk is in this case and how you could minimize that risk exposure?
 Would it make any difference if the company,borrowed the amount from a conventional bank?
 Justify your answer assuming the conventional bank interest rate is 15 per cent.