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At the end of year 5, we will assume that Deutsche Bank's earnings growth will drop to

4% and stay at that level in perpetuity. In keeping with the assumption of stable growth, we will also assume that

• The beta will rise marginally to 1, resulting in a slightly higher cost of equity of 8.87%.

Cost of Equity = Riskfree Rate + Beta * Risk Premium = 4.05%+ 4.82% = 8.87%

• The return on equity will drop to the cost of equity of 8.87%, thus preventing excess returns from being earned in perpetuity.

• The payout ratio will adjust to reflect the stable period growth rate and return on equity.

Stable Period Payout Ratio = 1 - g/ ROE = 1- .04/.0887 = .5490 or 54.9% The expected dividends in year 6 is calculated using this payout ratio: Expected Dividends in year 6 = Expected EPS6 * Stable period payout ratio

=€6.18 (1.04) * .549 = €3.5263 The value per share at the end of the fifth year can be estimated using these inputs: Terminal Value per share = Expected Dividends in year 6/ (Cost of equity - g)

= €3.5263/(.0887 - .04) = €72.41 The present value of the terminal value is computed using the high growth period cost of equity:

Present value of terminal value = Terminal Value/ (1+r)n = 72.41/1.08765 = 47.59 The total value per share is the sum of this value and the present value of the expected dividends in the high growth period:

Value per share = PV of expected dividends in high growth + PV of terminal value

= €7.22 + €47.59 = €54.80 The market price of Deutsche Bank at the time of this valuation was 66 Euros per share. Based upon out assumptions, Deutsche Bank looks over valued.

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