FIG (Banks & Insurance)
Derive the justified P/TBV multiple and apply it: ROTE of 14%, cost of equity of 10%, long-term growth of 2%.
Model answer
From the Gordon growth DDM with earnings = ROTE × TBV and payout = 1 − g/ROTE, value works out to: P/TBV = (ROTE − g) / (COE − g). Here: (14% − 2%) / (10% − 2%) = 12/8 = 1.5x, so a bank with $20.00…
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