close to the cost of debt and if we incorporate more debt it will rise. Cost of debt also rises as gearing level increases; this is because of increased credit risk and firm’s ability to pay interest on time. Current cost of capital of the bank is 3.02% and it will increase if more debt is introduced. The WACC will be lower at lowest possible gearing level however since it’s a financial entity(bank) we can’t eliminate long-term debt altogether but can conclude that it should keep the gearing level as low as possible. If we incorporate more debt at this point in this company ideally the share price will fall as the company becomes more risky to risk-averse investors however some investors believe that incorporation of debt in capital structure is a cheaper source of finance which can earn better return at lower cost so they might invest more money. Abu Dhabi Stock Exchange is not a very efficient market so we can expect that share price will not show significant change in short term if the incorporates more debt. ADIB’s current rating according to moody’s is A2 and A+ according to fitch’s. For under leveraged firms the ratings go downside pattern if optimal capital structure is reached through more debt incorporation however ADIB’s position is in contrast with that since it’s over leveraged if we reach the lowest gearing levels it would reach better rating. Ratings are also dependent upon the volatility of operating income. The operating income of ADIB shows a positive trend as it’s a growing bank. The relative analysis can be made with banks operating in the same jurisdiction and listed in Abu Dhabi Stock Exchange.
close to the cost of debt and if we incorporate more debt it will rise. Cost of debt also rises as gearing level increases; this is because of increased credit risk and firm’s ability to pay interest on time. Current cost of capital of the bank is 3.02% and it will increase if more debt is introduced. The WACC will be lower at lowest possible gearing level however since it’s a financial entity(bank) we can’t eliminate long-term debt altogether but can conclude that it should keep the gearing level as low as possible. If we incorporate more debt at this point in this company ideally the share price will fall as the company becomes more risky to risk-averse investors however some investors believe that incorporation of debt in capital structure is a cheaper source of finance which can earn better return at lower cost so they might invest more money. Abu Dhabi Stock Exchange is not a very efficient market so we can expect that share price will not show significant change in short term if the incorporates more debt. ADIB’s current rating according to moody’s is A2 and A+ according to fitch’s. For under leveraged firms the ratings go downside pattern if optimal capital structure is reached through more debt incorporation however ADIB’s position is in contrast with that since it’s over leveraged if we reach the lowest gearing levels it would reach better rating. Ratings are also dependent upon the volatility of operating income. The operating income of ADIB shows a positive trend as it’s a growing bank. The relative analysis can be made with banks operating in the same jurisdiction and listed in Abu Dhabi Stock Exchange.
my-corporate-finance-project.docx