Let us take the example of e-Bank.
We know that the equity invested by shareholders in e-Bank is equal to $100 million (see the balance sheet in Stage 1). Imagine that the stock market expects e-Bank to generate a steady annual profit after tax of $10.8 million, paid every year as a dividend.
The return on equity (ROE = profit/equity = 10.8/100) of e-Bank is 10.8%.
To simplify the example and avoid unnecessary maths, imagine that the bank is closed after three years, and that investors, your sister included, recover their initial equity investment of $100 million. The timing of the dividends accruing to investors is as follows:
|Year 1||Year 2||Year 3|
|Cash flow (dividends) to investors||+10.8||+10.8||+10.8 + 100|
Two cases will be ...