Return on equity (ROE) is key to properly valuing bank stocks from an “excess equity return” standpoint. This is the process by which we take a company’s “equity cost” (book value of equity multiplied by cost of equity) and subtract it from projected net income to derive an “excess equity return.” We then take these excess equity returns, discount them back to the present and subtract from the book value of equity to determine the theoretical intrinsic value of its market cap.I have Goldman Sachs’ (GS) cost of equity calculated at 14.88%, which is partially a matter of its characteristics and partially a matter of my own personal requirements. (When I invest in something, I would ideally like above a 15% return.) I have the firm’s 2016 ROE projected at 6.34%, well south of its cost of equity, which would leave our excess equity return negative. Below the implied share prices of GS based on various constant ROE assumptions. For example, if GS's business performance operated at 14% ROE long-term, the company's shares would be worth approximately $169.