Value of Equity in a Bank

Estimate the value of equity in a bank

by Prof. Aswath Damodaran
Professor at NYU Stern School of BusinessFollow 951

with NYU Stern School of Business
An Education in PossibleFollow 46

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Description
Estimates the value of equity in a bank by discounting expected excess returns to equity investors over time and adding them to book value of equity.

Inputs needed:
1. Length of high growth period
2. Expected growth rate in earnings during the high growth period.
3. Dividend payout ratio during the high growth period.
4. Expected growth rate in earnings during the stable growth period.
5. Expected payout ratio during the stable growth period.
6. Current Earnings per share
7. Inputs for the Cost of Equity

Options: You can make this model into a three stage model by answering yes to the question of whether you want me to adjust the inputs in the second half of the high growth period. If you do, I will adjust the growth rate, the payout ratio and the cost of equity from high-growth levels to stable growth levels gradually. You can also make this a stable growth model by setting the high
growth period to zero.

Note: this model is being shared with the authorization of Professor Aswath Damodaran from NYU Stern Business School (www.damodaran.com)

This Best Practice includes
1 Excel Model File