Financial Paper (Shares and Bonds) — practice questions

Correct answer: D. Clauses 3/4/1 to 3/4/5: Investing in or trading shares of companies with a permissible primary activity that sometimes deal in Riba is exempted from the basic prohibition only if all conditions are met: no prohibited objective in the memorandum; interest-based borrowings not exceeding 30% of market capitalisation; interest-bearing deposits not exceeding 30% of market capitalisation; and income from prohibited components not exceeding 5% of total income, determined from the last budget or verified financial position. Company Z fails the 5% income test, and purification cannot cure a failed screen; it applies only to otherwise eligible investments.

Correct answer: A. Clauses 3/4/2 and 3/4/5: The collective amount raised as interest-based loans, whether long-term or short-term, must not exceed 30% of the corporation’s market capitalisation, bearing in mind that raising interest-based loans is prohibited whatever the amount. The percentages are determined by reference to the last budget or verified financial position. The 5% threshold relates to prohibited income as a proportion of total income (Clause 3/4/4), not to liabilities.

Correct answer: C. Clauses 3/4/6/2 and 3/4/6/4: The amount to be eliminated is obtained by dividing the corporation’s total prohibited income by its number of shares (USD 2,000,000 ÷ 10,000,000 = USD 0.20 per share) and multiplying by the number of shares held (0.20 × 50,000 = USD 10,000). The subject-matter of elimination is the prohibited income specific to the share whether or not profits have been distributed and whether the corporation made a profit or a loss, so the dividend payout ratio is irrelevant, and the market value of the holding is not the basis.