MASTER IN INTERNATIONAL MANAGEMENT

IAE POITIERS

EXAM International financial markets 2021-22 (1 hour)

No document allowed – Calculator allowed

Answer the questions of these two exercises

STUDENT’S NAME : …………………………………………

Exercise 1 (12 points)

Toshiba is a large Japanese firm which operates mainly in electronics, consumer goods and health
services. It is affiliated to the Mitsui keiretsu and is a major international company. In 2014 Toshiba
experienced a huge financial and fraud scandal as it disclosed overestimated accounts and earnings
during the 2008-2014 period.

1)With the following figures, calculate the ROE of the firm in %.

(in billion Total Shareholders' Sales EBIT Net ROE

yens) assets Equity Income
1997 5809 1265 5453 154 67
2000 5702 982 5749 101 -28
2005 4223 816 5836 150 46
2010 5451 797 6382 117 -19
2015 6335 1084 6656 263 -38
2017 4269 -552 4871 288 -965

2)Comment its evolution, as well as the evolution of the sales. Are these levels good enough? Why?

3)If Toshiba needs it, what kind of help the belonging to Mitsui keiretsu could give? Please mention 5
possibilities.

turn please…/…
Exercise 2 (8 points)
Compared to conventional finance, the Islamic finance is based on two important prohibitions : riba
and gharar.

1) Explain what riba means and what are the consequences for the financing tools that can be used.

2) Describe what implies the ban of gharar in financial transactions and how it can be mitigated.
Answers exam M2 MIM 2021-2022

Exercise 1 (12 points)

1)With the following figures, calculate the ROA and the ROE of the firm.

(in billion Total Shareholders' Sales EBIT Net ROE = Net

yens) assets Equity Income income/Equity
1997 5809 1265 5453 154 67 5,30 %
2000 5702 982 5749 101 -28 -2,85 %
2005 4223 816 5836 150 46 5,65 %
2010 5451 797 6382 117 -19 -2,42 %
2015 6335 1084 6656 263 -38 -3,49 %
2017 4269 -552 4871 288 -965 174,82 %

2)Comment its evolution, as well as the evolution of the sales. Are these levels good enough?
Why?

Sales drop since 2015, and moderate sales growth since 1997: important issue for such a large firm,
operating in innovation in leading technological industries.

Major concern about negative net incomes since 2010, and specially in 2017.

Major concern about insufficient equity, which became negative in 2017: this would have meant
bankruptcy for a small firm!

The total assets have shrinked in lie with the equity, which means a main reduction of the global value of
the firm, and an impairment of its capacity to invest in the coming years.

ROE is either low (around 5%) or negative, which indicates that the firm does not create enough profit
considering its risk-taking (innovation, new products). In 2017 the ROE is positive and very high ONLY
because both net income and equity are negative, which is a dangerous situation. So the positive value is
not relevant here.
There is an immediate need of new equity and positive income for the year to come.

3)If Toshiba needs it, what kind of help the belonging to Mitsui keiretsu could give? Please
mention 5 possibilities.

-financing through the main bank of the group at a low interest rate, as Toshiba needs equity after its
huge losses in 2017

-financing new equity with cross-shareholding inside the keiretsu

-access to new retailors and customers to boost the sales that fell dramatically since 2015

-share of knowledge, research and development, and innovation, between several companies of the
keiretsu

-cost reduction through subtractor sharing inside the keiretsu

turn please…/…
Exercise 2 (8 points)
Compared to conventional finance, the Islamic finance is based on two important prohibitions: riba and
gharar.

1) Explain what riba means and what are the consequences for the financing tools that can be
used.
In the Islamic finance the concept of riba, representing the excess and by extension the interest on
loans is prohibited. This led a number of practicing Muslims to avoid the financial system as a whole.
The interest is prohibited because it corresponds to a gain of money linked to the passage of time,
whereas in conventioncal finance the interest rate is justified by the renunciation of immediate liquidity,
and thus immediate use of funds.
The Islamic law accepts the idea of a payment of funds loaned, without any fixed and predetermined
compensation. The compensation has to be linked to the profitability of the asset that is financed.

The ban on interest does not mean that capital is costless in the islamic system. Islam recognizes
capital as a factor of production. Rather, the Islamic approach distinguishes between the time value of
money and the means of determining expected yield. Therefore, yields are either based upon profit and
loss sharing in the enterprise or negociated price for sale or lease transactions. Money is not seen as
having an intrinsic value independent of the result of an investment or transaction.

Thus Islamic finance favours equity over loans. The borrower knows that in case of financial
problems the rewarding of the debt is no more mandatory, which means that financial costs are variable
costs (whereas they are fixed costs in conventional finance).
As a consequence, the leverage effect is almost absent, which should imply both less bankruptcies
and lower returns on equity. Indeed, the less profitable firms may not stop their activity because of
payment defaults, and continue to sell with low returns which decrease the average return of their
industries.
Riba’s first meaning is excess, and by extension « every loan that draws interest », or « every loan
where a specified repayment period and an amount in excess of capital is predetermined ».
Riba as established in the quran and Sunnah is defined as an excess, resulting from predetermined
interest, which a lender receives over the principal amount it has lent

Consequences for bank accounts: current accounts or saving accounts in banks cannot bear interests.

2) Describe what implies the ban of gharar in financial transactions and how it can be mitigated.
Gharar’s first meaning is “to deceive, cheat, lure, and overall uncertainty”.
Gharar has to be avoided as it represents uncertainty in its various forms: any transaction in which
one of the elements of the contract is not known, or because the issue of the transaction is unknown for
one of the parties, or the delivery is not under the control of the debtor (who has to deliver) and depends
on something else, or the payment is partly uncertain, and related to other events.

The ban of gharar in commercial contracts is close to the idea of consumer protection and information,
and contract transparency in Western business laws.
Examples of gharar: sale of an unborn sheep’s baby still in the mother’s womb, sale of flowers before
they appear on the plant, advising a customer to buy shares of a particular company, that is the subject of
a takeover bid, on the grounds that its share price can be expected to rise.

Potential mitigation of gharar

If a sale takes place while the selling price has not been specified, it is invalid. It can sometimes be
considered valid if the market price is applied.
If the payment of a sale is postponed, and linked to an event whose date is uncertain, but the
occurrence is certain, the uncertainty may be neglected. For example, a supply of pears will be paid after
the next harvest.
Hedging with options is prohibited as these financial products are banned by the sharia. Hedging risk
in Islamic finance is therefore very problematic.