Function
Corporate Valuation
Relative metrics : Price/Equity Price/Book Value
Use Equity Multiples (as opposed to Enterprise Multiples). In order to consider how valuing a Financial Institution's balance sheet is different from a non-Financial firm. Consider how an industrials firm wields capital machinery (asset) and the loans it used to finance that asset (liabilities). The line is blurred in Financial Institutions, which must hold deposit accounts (assets) to fuel the issuance of loans. The same accounts are considered loans as they are held in ownership not of the bank, but of the individual client.
Dividend Discount Model : Earnings-per-share
Dividends-per-share
Discounted Cash Flow (DCF) Model : You'll need the FCFE (Free Cash Flow for Equity), which is the amount of money that is returned to shareholders. Calculalj;;te a FCFF (Free Cash Flow to the Firm): EBIT(1-tax rate)-Capital Expenditures+(Depreciation & Amortization) - (Net increase in working capital)= FCFF
FCFF-Debt+Cash=FCFE
Use the Capital Asset Pricing Model, not the Weighted Average Cost of Capital (for the same reasons one uses Equity Multiples in relative valuation) to determine the cost of equity (the return required by shareholders in order to make the decision to invest in a financial institutions)