FIG (Banks & Insurance)
Quick DDM: a bank has $10B of tangible common equity, earns a 15% ROTE, retains one-third of earnings, and has a 10% cost of equity. Value it.
Model answer
Net income = 15% × $10B = $1.5B. Retaining one-third ($0.5B) funds growth of g = ROTE × retention = 15% × 1/3 = 5%, leaving $1.0B distributed. As a growing perpetuity: value = $1.0B / (10% − 5%) =…
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