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.

Lessons From The Intelligent Investor

Lessons From The Intelligent Investor

If you're like a lot of people watching the recession unfold, you have likely started to look at your finances under a microscope. Perhaps you have started saving the annual savings rate by people has started to recover a bit.

Get My Free Ebook

Post a comment