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%) =…
The full, human-reviewed answer is in the bank.
Sign up free and Daily 10 serves you 10 questions a day from all 1,500+ — or go Pro for unlimited reps.
More from FIG (Banks & Insurance)
- Why is EV/EBITDA a meaningless multiple for a bank?
- Why does a standard unlevered DCF fail when you point it at a bank?
- Why do bankers value financial institutions on equity value only, never enterprise value?
- What does it mean when people say 'debt is raw material, not capital structure' for a bank?
- Why are capex and working capital effectively undefined concepts for a bank?
- Why is interest expense an operating item for a bank when it's a financing item everywhere else?