Assume that you are comparing the price-to-book ratios of the 13 largest banks in the United States
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Question:
Assume that you are comparing the price-to-book ratios of the 13 largest banks in the United States in 2000. The following table summarizes the price-to book ratios and the returns on equity earned by these firms:
Company Name | PBV | ROE |
Wachovia Corp. | 2.05 | 18.47% |
PNC Financial Serv. | 2.54 | 21.56% |
SunTrust Banks | 1.91 | 15.35% |
State Street Corp. | 6.63 | 19.52% |
Mellon Financial Corp. | 4.59 | 23.95% |
Morgan (JP) & | 1.74 | 19.39% |
First Union Corp. | 1.52 | 19.66% |
FleetBoston Fin'l. | 2.25 | 20.15% |
Bank of New | 7.01 | 25.36% |
Chase Manhattan Corp. | 2.60 | 24.60% |
Wells Fargo | 3.07 | 17.72% |
Bank of America | 1.69 | 19.31% |
Bank of Montreal | 1.23 | 18.08% |
Average | 2.99 | 20.2% |
a. If you were valuing SunTrust Banks relative to these firms, would you expect it to have a higher or lower price-to-book ratio than the average for the group? Explain why.
b. If you regress price-to-book ratios against returns on equity, what would your predicted price-to-book ratios be for each of these companies?
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