11.5 CASE STUDY ASSUMPTIONS The case study assumptions are given in Table 11.1. Table 11.1 XYZ Conventional Bank (5 millions) Debt ratio (%) 10 20 30 40 50 60 70 80 90 100 900 1000 90K 1000 800 200 800 1000 BOK 1000 800 300 700 1000 70K 1000 800 400 600 1000 60K 1000 800 500 500 1000 SOK 1000 800 600 400 1000 40K 1000 800 700 300 1000 30K 1000 800 800 200 1000 20K 1000 800 900 100 1000 1000 800 Capital (1000) Debt Equity Total Shares @ $10 Revenue Cost/expense EBIT Interest EBT Tax EAT ROE EPS Interest rate Tax rate 10% 40% 11.6 CASE STUDY QUESTIONS The questions are based on Table 11.1. 1. For a bank with debt, calculate and comment on the effect of changing levels of debt on 1.1 EBIT 1.2 EBT 1.3 EAT 1.4 ROE. See also Question 2. 1.5 EPS 2. Plot graphically the relationship between changing leverage and ROE. 3. For a bank with no conventional debt (an Islamic bank), calculate and comment on the effect of changing levels of debt on the following (use the same assumptions as for the conventional bank above): 114 Case Studies in Islamic Banking and Finance 3.1 EBIT 3.2 EBT 3.3 EAT 3.4 ROE 3.5 EPS 4. Highlight the key differences between the conventional and Islamic banks regarding the 3.4 ROE 3.5 EPS 4. Highlight the key differences between the conventional and Islamic banks regarding the effect of leverage on their financial ratios