Exam 4: Bank Valuation

Chase Manhattan and Wells Fargo were involved in a mega-M&A deal in 1998.

Growth appears to be less important in determining the price-earnings ratio of a bank's stock since deregulation.

According to the Managerial Issues material on "How Bank Management Can Create Value," banks create value by minimizing operating costs and use branching systems to attract core deposits and sell profitable retail products.

In their study of the determinants of the price-book ratio in bank mergers, Beatty, Santomero, and Smirlock found:

Increases in the riskiness of cash flows, other things equal, lower the price of a bank's stock.

The market price of bank stock is likely to respond most positively to announcements of:

A bank with high expected growth in earnings should have a low price-earnings ratio.

Rhoades found that the market to book ratio for a target bank in a merger was higher if it had a high ratio of capital to assets.

Which of the following M&A deals in the 1990s is incorrect?

Megamergers in the banking industry are confined primarily to the U.S., with little or no such activity in Europe and Japan.

If the market price of a bank's stock is $45, its cash dividends are $4, it pays a 5% stock dividend, and its earnings are $9, what is its price-earnings ratio?

There is some evidence that the market value of a bank's stock is negatively related to earnings from securities gains and losses.

If the growth rate of dividends increases, the value of a bank's stock will increase, all else the same.

According to Modigliani and Cohn, a high level of inflation causes equities to be undervalued.

Which of the following help to explain the sudden increase in large (mega) bank M&As in the 1990s?

Buying banks involved in mergers usually experience increases in the price of their stock, though the increase seldom exceeds 5 percent.