Deck 4: Bank Valuation

Question 1

The rate of return on a stock is the sum of the dividend yield and the price change.

Answer 1

True

Question 2

Stock dividends are considered equivalent to cash dividends in calculating the rate of return.

Answer 2

False

Question 3

If a stock pays $1 per share, and its price increases from $20 to $22 per share, the rate of return is 15 percent.

Answer 3

True

Question 4

Rates of return for CitiGroup and Chase Manhattan exceeded 20 percent in 1998.

Question 5

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

Question 6

The value of a share of stock is determined fundamentally by the cash benefits that the buyer expects to receive from the asset.

Question 7

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.

Question 8

The price earnings ratio may be obtained by dividing the total market value of the stock of the bank by the total dollar value of its earnings.

Question 9

The price-earnings ratio summarizes the outlook for the future of the bank.

Question 10

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

Question 11

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.

Question 12

Fraser and Kolari found that the Return of Assets was substantially higher for high premium merging small banks.

Question 13

Beatty, Santomero, and Smirlock found that merger premiums were higher for target banks that had high ratios of U. S. Treasury investments to total assets.

Question 14

A dollar increase in operating earnings appears to have the same impact on stock price as a dollar increase in capital gains.

Question 15

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

Question 16

Deregulation appears to have changed the determinants of bank stock prices.

Question 17

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

Question 18

Banks involved in mergers and acquisitions across state lines do not experience financial gains.

Question 19

Target banks involved in mergers seldom experience stock price increases of over 10 percent.

Question 20

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

Question 21

Rolls' hubris hypothesis argues that bank managers pay too much in acquisitions because they have excessive arrogance about their ability to produce profits from the merger organization.

Question 22

Synergy is a potential benefit of bank mergers and acquisitions that is closely related to agency costs.

Question 23

Large banks involved in mergers appear to produce superior cash flows.

Question 24

Unlike smaller banks, megabanks are likely to be motivated to merge or acquire other banks due to market power considerations.

Question 25

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

Question 26

When the competitive environment has considerable uncertainty, it may be advantageous for banks to expand their size and scope to reduce their risk.

Question 27

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

Question 28

The price-earnings ratio is the conventional way to express the sales price of a target bank in a merger or acquisition deal.

Question 29

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

Question 30

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

Question 31

The rate of return from holding a stock for a year is the sum of:

A) the dividend yield plus the change in the yield
B) the dividend yield plus the change in the price of the stock
C) the amount of stock dividends adjusted for the change in the price of the stock
D) none of the above.

Question 32

Assume that a stock pays $1 per share cash dividend and that during the year its market price increased from $20 to $25 per share. The rate of return on this stock is:

A) 25%
B) 30%
C) 4%
D) None of the above.

Question 33

The determinants of the value of a share of stock may be thought of as:

A) the amount of cash flows
B) the timing of cash flows
C) the riskiness of cash flows
D) all of the above.

Question 34

Which of the following would produce an increase in the price of a bank's stock?

A) an increase in expected future dividends
B) expectations of more cash dividends to be received in the near future
C) a reduction in the required rate of return
D) all of the above.

Question 35

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?

A) 11.25
B) 5
C) 9
D) none of the above

Question 36

If the market price of a bank's stock is $20, it pays no cash dividend, it pays a 5% stock dividend, and its earnings are negative, what is its price-earnings ratio?

A) 4
B) Infinite
C) Not meaningful
D) 5

Question 37

According to Modigliani and Cohn, high inflation tends to cause equities to be:

A) overvalued
B) undervalued
C) appropriately valued

Question 38

As the growth rate of dividends increases, the market price of bank stock will ________, holding all else the same.

A) decrease
B) increase
C) not change

Question 39

If a rising level of interest rates causes the nominal discount rate for equity to increase, the market price of bank stock will ________, holding all else the same.

A) decrease
B) increase
C) not change

Question 40

In the study by Stephen Rhoades on the determinants of the ratio of the market price of a bank's stock to its book value, the author found which of the following variables to be important?

A) the growth of assets of the target firm
B) the growth of the market
C) the target's capital-to-asset ratio
D) all of the above.

Question 41

In Fraser and Kolari's study of the price-book ratio for smaller banks involved in mergers, the author's find:

A) high profit banks commanded higher merger premiums
B) high premium banks had a higher fraction of their assets financed with demand deposits
C) high premium small banks were located in markets experiencing greater population growth
D) all of the above

Question 42

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

A) the merger premium was higher for more profitable banks
B) the merger premium was positively related to the ratio of U. S. Treasury securities to total assets
C) the merger premium was negatively related to the ratio of loans to total assets
D) a and c

Question 43

Barth, Beaver, and Wolfson, in their study of the influence of operating earnings and securities gains and losses, found that:

A) banks with higher operating earnings had higher stock prices
B) banks with higher securities gains had higher stock prices
C) banks with securities gains had lower stock prices
D) a and c

Question 44

Visser and Wu in their study of the determinants of bank price-earnings ratios before and after deregulation found:

A) before DIDMCA, the growth rate of deposits, the growth rate of earnings, and the ratio of capital to assets were positively associated with the price-earnings ratio
B) after DIDMCA, the divided payout ratio became more significant while the past earnings growth rate remained highly important
C) after DIDMCA, growth became less important
D) all of the above.

Question 45

Hughs, Lang, Mester, and Moon found that banks involved in mergers and acquisitions across state lines benefited in terms of:

A) diversification benefits
B) greater revenues
C) lower operating risk
D) a and c
E) a, b, and c

Question 46

The conventional way to express the sales price of a target bank in a merger or acquisition deal is to use the:

A) price-earnings ratio
B) price-book ratio
C) price alone
D) none of the above

Question 47

What usually happens to the price of the seller's (target's) stock in a bank merger?

A) it goes up substantially, often over 10%
B) it shows little change
C) it goes down slightly
D) there is no predictable pattern

Question 48

What usually happens to the price of the buyer's (bidder's) stock in a bank merger?

A) it goes up slightly
B) it declines
C) remains unchanged
D) there is no predictable pattern

Question 49

Plausible explanations of the lack of positive stock market response for buyer announcements of bank acquisitions include:

A) Managers of the buyer's bank may not have as their principal goal the maximization of shareholder wealth. Managers may be interested in maximizing their own welfare.
B) Roll's hubris hypothesis which argues that managers overpay because they have excessive arrogance about their ability to produce profits from the merged organizations.
C) Bankers may be attempting to maximize shareholder value but the stock market may be focusing on the short run rather than the long run.
D) All of the above.

Question 50

Synergy as a motive in bank mergers and acquisitions is related to:

A) management expertise
B) agency costs
C) cost efficiency
D) a and c
E) a, b, and c

Question 51

Cornett and Tehranian examined the post-acquisition performances of large bank mergers and found:

A) the merged banks showed evidence of superior cash flow performance
B) the merged banks improved their ability to attract loans and deposits
C) employee productivity declined at the merged banks
D) a and b

Question 52

Price-earnings ratios of large U.S. banks during the economic recession in 2002:

A) increased
B) decreased
C) did not change for the most part

Question 53

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

A) increased operating earnings
B) increased earnings from securities gains
C) increased earnings from other income
D) a and b

Question 54

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

A) deregulation of geographic restrictions
B) more favorable antitrust climate in financial services
C) lower profit rates of banks compared to the 1980s
D) a and b
E) a, b, and c

Question 55

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

A) Chase Manhattan and Chemical Bank
B) Wells Fargo and Norwest
C) BankAmerica and NationsBank
D) None of the above, they all occurred in the 1990s

Question 56

According to a study by Milbourn, Boot, and Thakor, a theoretical explanation for megamergers in the banking industry is to:

A) increase synergy
B) increase diversification
C) increase market power
D) decrease competitive uncertainty