Two managerial rules can be deduced from this simple example.
Value is created for shareholders as long as the market value of shares (MV) exceeds the value of equity invested:
Value creation if market value (MV) > equity
The ALM process of a bank will have to ensure that managerial decisions lead to value creation, a management style referred to as value-based management.
One can easily check that the market value of shares will exceed the equity investment of 100 when the return on equity (ROE) of e-Bank exceeds the discount rate used by the stock market. In Case 1, the ROE of 10.8% exceeds the discount rate of 5% and there is a value creation of 15.8. In Case 2, the ROE of 10.8% was below the discount rate of 15%, and there was ...