Methods of Analysis

A brief report has been prepared on the First Abu Dhabi Bank and the net income of the last 10 years has been considered to calculate the growth and cost of equity of the company. Stock pricing has been done using two known methods, the calculation for which has been shown below. The sensitivity analysis has also been done to find out what would be the changes in the stock price in case the cost of equity and the growth of the company is being changed by 0.1%. The results of all such 10 scenarios each has been shown through the table (Heminway, 2017).

The extracts of the consolidated balance sheet and the income statement shown in the appendices have been taken from the annual report of the company “First Abu Dhabi Bank” of the respective years from 2007 to 2017. Over the period of time, the reporting requirements have changed and there have been introduction of new ways of reporting in the balance sheet and profit and loss account but in the above consolidation, due care has been taken so as to ensure the uniformity of the different heads and accounts (Alexander, 2016). This will help in comparability of the financial statements over the years. From the income statement, we can see from the net interest income has increased over the years, however the rate of increase has slowed in the past 2-3 years. Similarly, the net income from Islamic financing contracts have also increased over the years (Choy, 2018). From the consolidated statement of financial position, it can be seen that the overall assets have almost increased 4 times from 139 billion in 2007 to 668 billion to 2017. The cash reserves of the company have grown considerably during this period, similarly, the loans and advances given by the bank and the non-trading investments have also increased during this period (Bromwich & Scapens, 2016). As far as the equity position of the company is concerned, we can see that the company has been issuing the share capital year on year and in 2017, it issued shares on premium at a large scale (Goldmann, 2016).

The stock pricing has been done using 2 methods:

1. Infinite Growth Model: In this model, the net income of last 10 years was considered and the average growth of 2 years was computed for the series of years. Since the merger took place in 2017 therefore the growth being unusual, the average of last 5 years growth was considered to evaluate the sustainable growth rate(Solicitors, 2016). The beta, market risk premium and the risk free rate was taken on actual basis and then the discount rate or the cost of equity was being computed (Trieu, 2017). Based on this the net income projection was done using infinite growth model and the present value of the same was calculated using the discounting factor. Shares outstanding was considered directly from the balance sheet and stock price was then computed.
2. 20 years Growth Model: In this model, the net income for the next 20 years was forecasted using the growth rate calculated above. The same was then discounted at the rate of equity and the price per share was computed using the no. of outstanding shares(Guragai, Hunt, Neri, & Taylor, 2017).

In section c and d of the question, sensitivity analysis has been done varying (increasing and decreasing) the cost of equity by 0.1% and keep the growth rate constant at 2% and then varying the growth rate by 0.1%, keeping the cost of equity constant at 10% (Linden & Freeman, 2017). The results of the same has been shown below:

Sl. No. Save Time On Research and Writing Hire a Pro to Write You a 100% Plagiarism-Free Paper. Get My Paper	Cost of Equity	Growth Rate	Stock Price
Method 1	Method 2
1	7.42%	2.00%	19.98	12.69
2	7.52%	2.00%	19.62	12.59
3	7.62%	2.00%	19.27	12.49
4	7.72%	2.00%	18.93	12.39
5	7.82%	2.00%	18.61	12.29
6	7.22%	2.00%	20.75	12.90
7	7.12%	2.00%	21.16	13.01
8	7.02%	2.00%	21.58	13.12
9	6.92%	2.00%	22.02	13.23
10	6.82%	2.00%	22.48	13.34

Sl. No.	Cost of Equity	Growth Rate	Stock Price
Method 1	Method 2
1	10.00%	5.70%	26.92	14.13
2	10.00%	5.80%	27.62	14.25
3	10.00%	5.90%	28.35	14.38
4	10.00%	6.00%	29.11	14.50
5	10.00%	6.10%	29.92	14.63
6	10.00%	5.50%	25.63	13.89
7	10.00%	5.40%	25.02	13.77
8	10.00%	5.30%	24.44	13.65
9	10.00%	5.20%	23.89	13.53
10	10.00%	5.10%	23.35	13.42

 The other calculation has also been shown below (Marques, 2018):  

Conclusion 

From the above discussion and analysis, we can see that the book price per share as per method 1 is quite high and as per method 2 is near to the current share price (Vieira, O’Dwyer, & Schneider, 2017). However, one common thing is that the share is undervalued in both the scenario and the investors should go for buying the shares. Furthermore, as per the sensitivity analysis, when the growth rate is kept constant and the cost of equity increases, the share prices decreases and vice versa. The magnitude of change is more in method 1 as compared to method 2 (Jefferson, 2017). Similarly as per method 2, when the cost of equity is kept constant and the growth rate increases, the stock prices increases and vice versa. Again, the magnitude of change is more in method 1 as compared to method 2.

References 

Alexander, F. (2016). The Changing Face of Accountability. The Journal of Higher Education, 71(4), 411-431.

Bromwich, M., & Scapens, R. (2016). Management Accounting Research: 25 years on. Management Accounting Research, 31(1), 1-9.

Choy, Y. K. (2018). Cost-benefit Analysis, Values, Wellbeing and Ethics: An Indigenous Worldview Analysis. Ecological Economics, 145. Retrieved from https://doi.org/10.1016/j.ecolecon.2017.08.005

Goldmann, K. (2016). Financial Liquidity and Profitability Management in Practice of Polish Business. Financial Environment and Business Development, 4(3), 103-112.

Guragai, B., Hunt, N., Neri, M., & Taylor, E. (2017). Accounting Information Systems and Ethics Research: Review, Synthesis, and the Future. Journal of Information Systems: Summer 2017, 31(2), 65-81.

Heminway, J. (2017). Shareholder Wealth Maximization as a Function of Statutes, Decisional Law, and Organic Documents. SSRN, 1-35.

Jefferson, M. (2017). Energy, Complexity and Wealth Maximization, R. Ayres. Springer, Switzerland . Technological Forecasting and Social Change, 353-354.

Linden, B., & Freeman, R. (2017). Profit and Other Values: Thick Evaluation in Decision Making. Business Ethics Quarterly, 27(3), 353-379. Retrieved from https://doi.org/10.1017/beq.2017.1

Marques, R. P. (2018). Continuous Assurance and the Use of Technology for Business Compliance. Encyclopedia of Information Science and Technology, 820-830.

Solicitors, S. (2016). The Principles of Contract. Contract, 13.

Trieu, V. (2017). Getting value from Business Intelligence systems: A review and research agenda. Decision Support Systems, 93(1), 111-124.

Vieira, R., O’Dwyer, B., & Schneider, R. (2017). Aligning Strategy and Performance Management Systems. SAGE Journals, 30(1).