PRINCIPLES AND PRACTICE OF ISLAMIC BANKING (MIFB 6023) ASSIGNMENT 2CRR-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 Answers to question 1Classification of AssetsCurrent assetsCash, marketable securities, accounts receivable, prepaid expenses, inventoriesSummation of Current AssetsCurrent assets = cash + marketable securities + accounts receivable + prepaid expense +inventoriesFixed assetsLand, plant and equipment______________________________________________________________________________Classification of LiabilitiesCurrent liabilitiesAccounts payable and accrued expensesSummation of Current LiabilitiesCurrent liabilities = accounts payable + accrued expensesLong term liabilitiesBonds payable______________________________________________________________________________Other financial data from the balance sheet and income statementSales =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 (fourthand fifth item under liabilities and equities from the balance sheet)
2 Formulae used: Quick ratio = Current ratio = Return on Equity (RoE) = *100% Net Profitability ratio = *100% a. Quick ratio = = = 2.19Quick ratio = 2.19 times.The firm is actually liquid because the ratio is greater than 1. This indicates that the chance thefirm can pay creditors when payments are due is very high. For every RM1.00 of currentliabilities, 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 isliquid enough to pay any short term debt.
3 b. Current ratio = = =2.75Current ratio = 2.75 times.The firm is actually liquid because the ratio is greater than 1. This indicates that the chance thefirm can pay creditors when payments are due is very high. For every RM1.00 of currentliabilities, 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 liquidto pay any short term debt. c. Return on Equity (RoE) = *100% = *100% = 5.29%Return on Equity = 5.29%.The firm’ return on equity is lower than the industrial average which is 10%. This indicates thatthe managers of SME Corporation are not maximizing shareholders’ wealth.
4 d. Net Profitability ratio = *100% = *100% = 12.38%Net Profitability ratio = 12.38%The firm has lower profitability ratio than the industrial average which is 18%. This is anindication that the corporation’s assets and capital are not generating profit efficiently._____________________________________________________________________________________Section 2GivenMarket value of the land =RM 500000Forced value of land = RM 4900, 000Financing amount = RM 4800, 000Profit rate = 8%Financing period = 7yearsAnnuity 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. Abank will only finance at forced sale or lower but NOT market price. This is because; the bankhas to avoid taking risks in such a transaction.Note: Periodic repayment is on monthly basis in this case, hence 7years * 12 =84