Managerial finance Bank Dhofar cost of capital Bank Dhofar Background Share Price movement for the year 2015 Why Bank Dhofar? The Analysis Beat Calculation Comparison between risk and return in 2012 and 2013 Calculating WACC WACC Calculation using Book Value: WACC Calculation using Market Value: Summary References

1. Sultan Qaboos University
College of Commerce & Economics
FINA 6322 (MBA)
Bank Dhofar
Cost of Capital Project
Prepared By: Balqees Saud Al Makhmari

2. 1
Content
Introduction 2
Bank Dhofar Background
Share Price movementfor the year 2015
2
3
Why Bank Dhofar? 4
The Analysis 8
Beat Calculation 8
Comparisonbetweenriskand returnin 2012 and 2013 8
Calculating WACC 9
WACC Calculationusing BookValue: 11
WACC Calculationusing Market Value: 12
Summary 14
References 15

3. 2
Introduction
The cost of funds used for financing a business. Cost of capital depends on the mode of financing used – it
refers to the cost of equity if the business is financed solely through equity, or to the cost of debt if it is
financed solely through debt
For any company, capital is the fund it needs to collect to operate and do its business. Therefore, it needs
sources to get that capital. These sources have cost in which a company should pay to acquire the capital. Cost
of capital concept is one of the major standards used to evaluate a business and make a reliable finance
decisions. The cost of capital concept helps companies to determine its capital structure through choosing the
right sources of capital in the right period.
In Our project, we have been chosen one component of MSM30 Index sample. We selected to talk about Bank
Dhofar (BKDB) to analyze the cost of capital and performance based on historical trading data from the period
of 2011 to 2015. Therefore, the comparison will take place with the Beta of the market performance
represented by MSM30 Index in the same period. In addition, the report studied the relationship between the
risk indicator "Beta" of the firm and the required rate of return that are asked by an investor to invest their
capital in that stock. Finally, the calculation of the WACC will be included to the average market return.
Bank Dhofar Background
Bank Dhofar, one of the big institution in the area, and it is growing rapidly to compete in the banking sector.
It is expanding very fast; it has a very special administration team. The bank has raised the money to finance
its investments through equity and debt. Bank Dhofar has exclusive products and services which result high
extraordinary reputation.
The bank, then known as Bank Dhofar al Omani al Fransi originally, was incorporated in January 1990 and
commenced operations with two branches, one in Muscat and the other in Salalah.
Bank Dhofar currently has a nationwide network of 58 branches (BankDhofar) 10 Branches of (Maisarah
Islamic Banking) and 127 ATMs and 49 CDMs and 5 FFMs across the length and breadth of the Sultanate.
Currently the outstanding number of shares of the bank is (1,544,728,546) and trades in the market for 0.214
Baisa. Omani Banking industry is fluctuating rapidly because of the competition and the players in the market
is increasing.

4. 3
As one of the fastest growing financial services institution in the Sultanate, they offer corporate banking,
Consumer banking, Treasury and Project Finance services - designed to meet the diverse needs of consumers,
small and medium size businesses and mid-market companies in the region.
Share Price Movements
The high/low share price information of the Bank during the financial year ended 31 December 2015
compared with Muscat Securities Market Financial Sector Index is as follows:
2015 Bank Dhofar Share Price (RO)
MSM Financial Sector
Index
Month High Low Closing Closing
January 0.366 0.340 0.356 8021.540
February 0.370 0.354 0.360 8181.720
March 0.370 0.284 0.285 7704.640
April 0.285 0.276 0.284 7733.370
May 0.286 0.272 0.275 7713.490
June 0.295 0.275 0.280 7740.250
July 0.283 0.270 0.281 8021.050
August 0.280 0.240 0.241 7068.410
September 0.214 0.230 0.235 6893.940
Octobar 0.250 0.232 0.244 7298.580
November 0.244 0.220 0.223 6645.790
December 0.220 0.206 0.214 6477.270
 Table Showsthe high / low prices of the Bank’sSharesin Rial Omaniduring the months
in the year 2015

5. 4
Why Bank Dhofar?
We are interested to know the level of risk for bank Dhofar share, that one of the several
reasons for choosing this bank for analysis and how it used to be compensated by a good
return. we want to invest in this bank so, we wantto know the risk and return and the
relationship between them. Also, there are many other reasons influence us to choose Bank
Dhofar:
1. Bank Dhofar is one of the large companies dominated the stock market in over-all and
the MSM 30 index.
2. In many cases, it is the benchmark for the whole market.
3. It is a well-known economic institution and one of the main competitors who plays in
banking business.
4. Continued focus on enhanced productivity and business diversification resulted in an
improvement.
5. From all aspects, the share of Bank Dhofar is one of the favorable shares for both
individual and common funds.
For the year of 2015, Bank Dhofar showed a positivegrowth with net interest and financing
income achieving a solid growth of 17.47% to reach RO 90.21 million (USD 234.31), and for the
non-interestand non-financing income such as fees and commission, foreign exchange profit,
investment and other income have grown 13.39%to reach RO 25.02 million (USDD 64.98
million). However, for the year 2014, thenet interest and financing income was 76.79 million
(USD 199.45 million) and the non-interest and non-financing was 22.06 million (USD 57.92
million). These indicate the profitability of Bank Dhofar.
Regarding to the costto income ratio, during the year 2015 itimproved to 44.43% as
compared with 46.69% in the 2014. Bank Dhofar careabout the loan growth and regulatory

6. 5
requirement, provision for loan impairment, net of recovery. During theyear of 2015, itstood
at RO 8.78 (USD 22.8 million), compared with 6.93 million (USD 18 million) during 2014.
The impairment of investments due to downward marketmovements during the year is RO
2.74 million (USD 7.12 million). Year- on – year, non-performing loans, net of interest
suspense, to gross loans improved from1.24% at31stDecember 2014 to 1.11% at31st
December 2015. Thenon-performing loans specifically improved from2.55% at31st
December 2014 to 2.30% at31stDecember 2015.
The net profit for the year 2015 achieved by the Bank is RO 46.77 million (USD 121.48 million)
as against RO 40.45 million (USD 105.06 million), showing a strong growth of 15.62% year on
year.
All Tables Bellow shows detailed reasons of choosing Bank Dhofar:
(OMR)
for the year
2015 2014 2013 2012 2011
Net interest income 84,475 73,580 66,341 64,369 60,318
Net incomefromfinancingand
investmentactivities
5,729 3,2008 173 - -
Non-funded income 25,019 22,063 23,044 19,724 18,273
Operating costs 51,199 46,163 45,316 37,047 33,444
Operating profit (Before implement
losses)
64,027 52,688 44,242 47,046 45,147
Profit from operation 52,501 45,754 66,137 42,900 15,859

7. 6
Net profit for the year 46,765 40,453 58,407 37,745 13,979
 Table showsfive yearsfinancialdata
At year-end
Total assets 3,593,061 3,194,127 2,605,379 2,143,830 1,960,591
Net loanportfolio 2,729,306 2,254,705 1,901,910 1,672,508 1,495,591
Customer deposits 2,592,371 2,482,179 2,031,746 1,643,628 1,519,318
Shareholder’s equity 476,529 325,318 303,607 261,504 229,237
Share capital 154,473 134,324 121,013 110,012 91,524
Full service branches 67 68 65 62 59
ATMs/ CDMs/ FFMs 187 197 187 171 157
Staff 1,371 1,340 1,350 1,266 1,202
Asat31
Dec2015
Asat31
Dec2014
Asat31
Dec2013
Asat31
Dec2012
Asat31
Dec2011
1. Profitability
Return on Weighted Average
Total Equity (Including AT1)
11.66% 12.86% 20.67% 15.38% 6.13%
Return on Weighted Average
Shareholders
13.63% 12.86% 20.67% 15.38% 6.13%

8. 7
Return on Average Assets 1.38% 1.40% 2.46% 1.84% 0.77%
Return on Weighted Average
Paid up Capital
32.39% 31.69% 50.56% 37.46% 16.17%
Non-funded income to
operating income
21.71% 22.32% 25.73% 23.45% 23.25%
Operating Expenses to
operating income
44.43% 46.70% 50.60% 44.05% 42.55%
2. Liquidity
Net Loans to Total Deposit 94.07% 84.84% 88.95% 97.05% 94.76%
Total Customer Deposit to
Total Deposits
89.35% 93.41% 95.03% 94.85% 96.26%
3. Assets Quality Ratios
Loan Loss Provisions to Total
Loans
3.49% 3.74% 4.07% 4.32% 4.93%
Non-Performing Loans to
Total Loans
2.30% 2.55% 2.95% 3.18% 3.79%
Loan Loss Provisions to Total
Non-Performing
151.88% 146.59% 137.91% 135.58% 129.33%
4. Capital Adequacy
BIS Risk Assets Ratio 14.70% 14.05% 14.09% 14.96% 14.79%
BIS Risk Assets Ratio on Tier 12.68% 10.76% 11.07% 10.92% 11.16%

9. 8
one Capital
Shareholder’s Equity/ Total
Assets
10.05% 10.18% 11.65% 12.20% 11.69%
The Analysis
 Beta Calculation
Based on the comparison between Bank Dhofar and MSM30 in the daily return for the period
from 2011 to 2015 the is provided in the appendix. The Beta for Bank Dhofar equals to
(0.78627), which indicates that the security price. It shows that it is less volatile than the
market.
 Comparison between risk and return in 2014 and 2015
we can observefromthe following two tables, in 2014 beta of Bank Dhofar is lower than the
market, and that shows thatit is less volatile than the market. That is why its return declined
by lower portion. MSM30's return decreased by -24.92% and thebank return dropped by -
4.04%. Whereas in 2015, thereis a small difference between the two betas. Beta of the bank is
lower which reflects the less volatility of the bank. Despite that, MSM30's return dropped by -
23.83% and the bank experienced lower drop by -0.87%.
MSM30 Bank Dhofar
BETA 1
0.02107914
RETURN -24.92% -4.04%
 Table showsthe Beta and Return of Bank Dhofar and MSM30 Indexfor the period 2014

10. 9
MSM30 Bank Dhofar
BETA 1 0.016233079
RETURN -23.83% -0.87%
 Table showsthe Beta and Return of Bank Dhofar and MSM30 Indexfor the period 2015
 Calculating WACC
To calculate the cost of equity for the firm, we need to the historical average return on market
for 24 years from 1992 to 2015. The yearly percent changes are summarized in the following
table:
No. Year Closing % change (yearly)
1 Dec 1989 -- --
2 Dec 1990 -- --
3 Dec 1991 1191.8
4 Dec 1992 1130.1 -5.2%
5 Dec 1993 1137.1 0.6%
6 Dec 1994 1461.6 28.5%
7 Dec 1995 1581.3 8.2%
8 Dec 1996 1993.6 26.1%
9 Dec 1997 4805.8 141.1%
10 Dec 1998 2284.7 -52.5%
11 Dec 1999 2502.63 9.5%

11. 10
12 Dec 2000 2012 -19.6%
13 Dec 2001 1502.08 -25.3%
14 Dec 2002 1918.6 27.7%
15 Dec 2003 2726.7 42.1%
16 Dec 2004 3375.05 23.8%
17 Dec 2005 4875.11 44.4%
18 Dec 2006 5581.57 14.5%
19 Dec 2007 9035.46 61.9%
20 Dec 2008 5441.12 -39.8%
21 Dec 2009 6368.8 17.0%
22 Dec 2010 6754.92 6.1%
23 Dec 2011 5695.12 -15.7%
24 Dec 2012 5760.84 1.2%
25 Dec 2013 6834.56 1.2%
26 Dec 2014 6,343.220 -7.2%
27 Dec 2015 5,406.220 -6.2%
Weighted AVG
(Expected return on the market) (Rm)
12.5%
 Table showsthe yearly percentchanges from 1992to 2015
The average return on the market is equal to 12.5%

12. 11
 Calculation of WACC based on Book Value:
1- The cost of Equity:
Rs = Rf + Beat * (Rm –Rf)
= 0.102+0.78627*(0.125-0.102)
=0.1200
2- The cost of Debt:
Bank Dhofar has perpetual bond with 6.85% coupon rate as in the following table:
Table (9): shows the book value weight of the bond
Bonds
Number of
Bonds
Market
Prices Market Value Yield to Maturity
Market
Value
Weight
Bank Dhofar
6.85%
3,000,000
1.065 3,195,000 6.39% 0.2%
Total 3,000,000 3,195,000
As these calculations show, the cost of debt for the bank is on a book value basis. The table
below shows the capital structure weights on a book value basis.

13. 12
Table (10): shows the capital structure weights on a book value basis
Type of Security Capital Book Value Weight
Common Stock 1,544,728,546 99.8%
Bond 3,000,000 0.2%
Total 1,547,728,546 100.0%
The book value of equity is equal to the total of stockholder’s equity recorded in the first
quarter of the bank which is equal to R.O (1,544,728,546)
So the total value of the bank based on book value is:
1,544,728,546+ 3,000,000 = R.O
1,547,728,546
WACC = * Re + * Rd * (1 – Tc)
WACC = 0.998*0.1200+0.002*0.0639* (1-.12)
= 0.12 = 12%
 WACC Calculation using Market Value:

14. 13
1- The cost of Equity:
It is same as in the previous calculation, equal to 0.1200.
2- The cost of Debt:
The YTM is for the bond 6.85% is also the same (6.39%).
The difference is in the market value and weights since the recent closing prices differs
from the book value.
Table (11): shows the capital structure weights on a Market value basis
Type of Security
Number of
shares
closingprices Market Value
Market Value
Weight
Closing Price
based on
Common Stock
1,544,728,546
0.214 330,571,908.8 0.99 31/12/2015
Bond 6.85%
3,000,000
1.065 3,195,000 0.01 31/12/2015
Total MV 1,547,728,546 333,766,908.8 1.000

15. 14
The stock market value = Number of outstanding shares * Market price
= 1,544,728,546 * 0.214
= R.O 330,571,908.8
Total Bank Dhofar Market Value = 330,571,908.8+3195000
= 333,766,908.8
WACC = * Re + * Rd * (1 – Tc)
WACC = 0.99*0.1200+0.01*0.0639* (1-.12) = 11.9%
The bank market value R.O. (333,766,908.8) differs from the book value which was R.O
(1,547,728,546). This is actually due to the increase in stock prices and it is traded at prices
slightly higher than the book value and some companies their stocks are traded below the
book value. However, both ways of calculating WACC give very close results.

16. 15
Summary
In conclusion, this report was dedicated towards better understanding of Bank Dhofar’s capital
structurethrough the evaluation of its cost of capital and the correlation of its stocks’ risk and
returns. Based on the findings, Bank Dhofar is a good place to investin if one is interested to
play safely; though the return is lower than other places, the risk involved is less.
To sum up the analysis show the bank Dhofar stock moving in the same direction with the
market in the period from 2011 to 2015. But as beta shows it is less volatile than the market.
In return, there was good return compensating that risk. So, for those who are really risk
seeker it is recommended to invest in this stock.

17. 16
References
www.bankdhofar.com,Bank Dhofar website
www.msm.gov.omMSM website,