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.

Retirement Planning For The Golden Years

Retirement Planning For The Golden Years

If mutual funds seem boring to you, there are other higher risk investment opportunities in the form of stocks. I seriously recommend studying the market carefully and completely before making the leap into stock trading but this can be quite the short-term quick profit rush that you are looking for if you am willing to risk your retirement investment for the sake of increasing your net worth. If you do choose to invest in the stock market please take the time to learn the proper procedures, the risks, and the process before diving in. If you have a financial planner and you definitely should then he or she may prove to be an exceptional resource when it comes to the practice of 'playing' the stock market.

Get My Free Ebook

Post a comment