You have been asked to value Best Bank, a publicly traded bank that generated $100 million
in net income in the most recent year on a regulatory capital base of $1billion (you can assume
that this is also the book value of equity) with one billion shares outstanding.
Over the next three years, you expect net income to grow 10% a year and regulatory capital
(and book equity) to increase 5% a year.
a) Estimate the FCFE each year for the next three years.
b) At the end of year 3, you expect the bank to be in stable growth, growing 3% a year, while
maintaining the return on equity it generated in year 3. If the cost of equity is 8%, estimate
the value of equity at the end of year 3.
c) What is the intrinsic value of the equity per share?
Answer rating: 100% (QA)
SOLUTION a To estimate the Free Cash Flow to Equity FCFE for each year over the next three years weView the full answer