Ch 04 Bank Valuation

Question 1

acquisition (bank)

Answer 1

The purchase of a target bank by a bidder firm in which the target bank retains its bank charter. It becomes an affiliate member of the bank holding company (BHC) in which the buying bank belongs.

Question 2

agency cost

Answer 2

The loss in shareholder wealth due to self-serving actions by managers, who seek to maximize their own salary, fringe benefits, job security, and so on at the expense of shareholders.

Question 3

bancassurance

Answer 3

A conglomerate financial services firm that combines banking and insurance activities.

Question 4

bidder (acquisitions)

Answer 4

This is the buyer in a merger or acquisition involving two firms.

Question 5

capital gain

Answer 5

The change in value or price of an asset between two points in time.

Question 6

dividend yield/return

Answer 6

This financial ratio is calculated as cash dividends to the current stock price of the firm.

Question 7

growth stock

Answer 7

A stock with a high P/E (price/earnings) ratio.

Question 8

hubris hypothesis

Answer 8

The notion that the managers of the buying firm in a merger or acquisition believe that they can better manage the target firm than its current management, thereby increasing its share valuation.

Question 9

market power

Answer 9

The ability of a bank (or other firm) to reach sufficient size to maintain its competitive position in the market.

Question 10

megabanks

Answer 10

Large banking institution with global operations that span a wide variety of financial services. The main reason for the sudden increase in large M&As that are creating so-called mega-banks is the deregulation of geographic and asset restrictions and more favorable antitrust climate in financial services

Question 11

merger

Answer 11

The purchase of a target firm by a bidder firm. The target bank is absorbed into the bidding or buying bank. As such, the target loses its bank charter, no longer needs a CEO and board of directors, and is converted to a branch office of the buying bank.

Question 12

price?book ratio

Answer 12

This financial ratio is calculated as the current stock price as determined in the financial market to book value of equity as reported on the balance sheet.

Question 13

price?earnings multiple or ratio

Answer 13

This measure summarizes the outlook for the future of the bank?the amount of its earnings and dividends, the timing of earnings and dividends, and the risk of those earnings and dividends. It is calculated by dividing the current market price by earnings per share.

Question 14

rate of return

Answer 14

This measure of what an investor obtains from holding a share of stock for a year or some other period is composed of two parts: (1) the dividend return (Dt) and (2) the capital gain in the value of the stock (Pt ? Pt-1). For example, if the price of the stock at Pt?1 was 50, the price at Pt equals 55, and the dividend payment was $1.00 per share, then the rate of return to each shareholder for the year is: Rate of return = 1 00 + (55 - 50) / 50 = 6/50 = 12%

Question 15

synergy

Answer 15

Economies of scale and scope associated with mergers and acquisitions that drive down operating costs per unit output of financial services. It can be a motive for M&A’s.

Question 16

target (acquisitions)

Answer 16

This is the seller in a merger or acquisition involving two firms.

Question 17

value stock

Answer 17

A stock with a low P/E (price/earnings) ratio.

Question 18

Goal of Bank Management

Answer 18

The goal of bank management should be to maximize the value of the owner?s equity. For a publicly traded bank, this involves making decisions that will increase the market value of the stock of the bank.