Managerial rules

Two managerial rules can be deduced from this simple example.

  1. 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.

  2. 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 ...

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