PRINCIPLES AND PRACTICE OF ISLAMIC BANKING

(MIFB 6023)

ASSIGNMENT 2

CRR-based Financing and Financial Ratios Problems

Prepared by

Mohamed Ibrahim Ismail

Matric Number: A1111477M04

Session: 2011/2012

Semester: First Semester

Date: 21st September 2011

Submitted to:

Assoc. Prof. Dr. Ahmed Fauzi bin Idris

1

الرحيم الرحمن الله بسم

Answers to question 1

Classification of Assets

Current assets

Cash, marketable securities, accounts receivable, prepaid expenses, inventories

Summation of Current Assets

Current assets = cash + marketable securities + accounts receivable + prepaid expense + inventories

Fixed assets

Land, plant and equipment

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Classification of Liabilities

Current liabilities

Accounts payable and accrued expenses

Summation of Current Liabilities

Current liabilities = accounts payable + accrued expenses

Long term liabilities

Bonds payable

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Other financial data from the balance sheet and income statement

Sales =6500, 000 (first item in the income statement)

Net Profit= Net Income=805,000 (last item in the income statement)

Common equity =common stock + retained profit =700,000 + 8200, 000 =15,200,000 (fourth and fifth item under liabilities and equities from the balance sheet)

2

a. Quick ratio = current assets−inventories

current liabilities

= 3,500,0001,600,000

= 2.19

Quick ratio = 2.19 times.

The firm is actually liquid because the ratio is greater than 1. This indicates that the chance the firm can pay creditors when payments are due is very high. For every RM1.00 of current liabilities, the firm has RM 2.19 to be ready for a payment.

The firm is more liquid than the industrial average which is 1.75 times, the SME Corporation is liquid enough to pay any short term debt.

Formulae used:

Quick ratio = current assets−inventories

current liabilities

Current ratio = current assetscurrent liabilities

Return on Equity (RoE) = Net Income

CommonEquity*100%

Net Profitability ratio = Net ProfitSales

*100%

3

b. Current ratio = current assetscurrent liabilities

= 4,400,0001,600,000

=2.75

Current ratio = 2.75 times.

The firm is actually liquid because the ratio is greater than 1. This indicates that the chance the firm can pay creditors when payments are due is very high. For every RM1.00 of current liabilities, the firm has RM 2.75 to be ready for a payment.

The firm is more liquid than the industrial average which is 2.05 times, the Corporation is liquid to pay any short term debt.

c. Return on Equity (RoE) = Net Income

CommonEquity*100%

= 80500015,200,000

*100% = 5.29%

Return on Equity = 5.29%.

The firm’ return on equity is lower than the industrial average which is 10%. This indicates that the managers of SME Corporation are not maximizing shareholders’ wealth.

d. Net Profitability ratio = Net ProfitSales

*100%

4

= 8050006,500,000

*100% = 12.38%

Net Profitability ratio = 12.38%

The firm has lower profitability ratio than the industrial average which is 18%. This is an indication that the corporation’s assets and capital are not generating profit efficiently.

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Section 2

Given

Market value of the land =RM 500000

Forced value of land = RM 4900, 000

Financing amount = RM 4800, 000

Profit rate = 8%

Financing period = 7years

Annuity factor = 1.55862096/100 =0.015586209 (from annuity factor table)

Note: since the cost of financing is less than the forced sale, the bank can finance the land. A bank will only finance at forced sale or lower but NOT market price. This is because; the bank has to avoid taking risks in such a transaction.

Note: Periodic repayment is on monthly basis in this case, hence 7years * 12 =84

Calculation

Monthly installment = financing amount * annuity factor

5

= 4800,000 * 0.015586209

= RM 74,813.81

Selling price = monthly installment * total number of periodic repayments

= 74,813.81 * 84

= RM 6,284,360.04

Profit amount = Selling price –Financing amount

= 6,284,360.04 – 4,800,000

= RM 1484,360.04

Redemption Amount = (numberof unpaidmonths )∗financing amount

totalnumber of periodicrepayments

= (2∗12)∗4,800,000

84 = (24)∗4,800,000

84

= 115,200,000

84 = RM 1371,428.57

Ibra amount = (numberof unpaidmonths )∗Profit amounttotal number of periodic repayments

¿(2∗12)∗1484,360.04

84 = (24)∗1484,360.04

84

= 35,624,640.96

84

= RM 424,102.87