Reference no: EM132955707

You have been asked to value Dexia Financials, a small, high growth bank, and are told that Dexia generated $150 million in net income in the most recent year on a book value of equity of $ 750 million; you can assume that the book value of equity is equal to the regulatory capital of the bank and that it has risk-adjusted assets of $ 5 billion right now.

Requirements:

1. Dexia expects its risk adjusted assets and net income to grow 10% a year for the next five years and plans to increase its regulatory capital ratio to 20% of risk-adjusted assets by the end of year 5 (with the ratio changing in equal annual increments over the five years). Estimate the FCFE of Dexia each year for the next 5 years.

2. After year 5, Dexia expects to be a mature bank, growing 3% a year in perpetuity, while continuing to earn the return on equity that it had at the end of year 5. If the cost of equity for mature banks is 9%, estimate the value of equity at the end of year 5.

3. If Dexia expects to have a cost of equity of 12% for the next 5 years, estimate the value per share, assuming that Dexia has 50 million shares.

Hint: Growth = ROCE * Reinvestments or Reinvestment = Growth / ROCE