O'Reilly logo

Asset and Liability Management: The Banker’s Guide to Value Creation and Risk Control, Second Edition by Youssef F. Bissada, Jean Dermine

Stay ahead with the world's most comprehensive technology and business learning platform.

With Safari, you learn the way you learn best. Get unlimited access to videos, live online training, learning paths, books, tutorials, and more.

Start Free Trial

No credit card required

Solution to Stage Two

1:

Consider a bank with an initial equity of 100, an ROE of 10%, and a life of three years. The profit is paid every year as a dividend plus a closing dividend of 110 at the end of three years. Compute the market value and value creation for the cases when the market discounts are at 12%, 10% and 8%.

 Year 1Year 2Year 3
Cash flow accruing to investors1010110

Managerial lesson

To create value, the ROE must exceed the market discount rate, the cost of equity.

With Safari, you learn the way you learn best. Get unlimited access to videos, live online training, learning paths, books, interactive tutorials, and more.

Start Free Trial

No credit card required