Now 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 |
P/BV 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 (J.P.) & Co |
1.74 19.39% |
|
First Union Corp. |
1.52 19.66% |
|
FleetBoston Fin”l |
2.25 20.15% |
|
Bank of New York |
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% |
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 yourpredicted price to book ratios be for each of these companies?