A critical overview oleg deev masaryk university, faculty of economics and administration, department of finance. This chart reveals how bank stocks are valued if youre wondering what dictates bank stock valuations, this chart will provide an answer. How to value a bank stock market insights seeking alpha. Its purpose is to help you understand how to value stocks. Asset managers rias, hedge fund managers, pe managers, broker dealers, etc. Essentially, stock valuation is a method of determining the intrinsic value or. The main contribution of this tutorial paper is that presents analytically through an example a framework to bank valuation using the ecf and ri model. Valuing banks, insurance companies and investment banks has always been. Chapter 7 stocks and stock valuation characteristics of common stock the market price vs. To value the equity in a firm, we normally estimate the free. The first three methods to value banks market multiples, value of dividends, value of economic. Given the income and cash flow effects of inventory valuation methods, it is often.
To arrive at this number, subtract liabilities from assets. Aswath damodaran investment valuation easyonlinebooks. The common free cash flow on equity fcee method is highly valid for bank. Book value per share tells investors what a bank s, or any stock s, book value is on a pershare basis. The common stock probably has a higher price because the dividend can grow, whereas it is fixed on. We refer to this as free cash flow or cash flow that is freed up. Dividend discount model commercial bank valuation fig. Add more advanced features other ways to calculate terminal value, more accurate regulatory capital, midyear discount andor stub periods, stock issuances. How to figure the book value of bank stock finance zacks. The riskfree rate is just the required rate of return for a theoretically riskfree asset, as.
In this scenario, the socalled pricetobook pb ratio is applied with a bank s stock price compared to equity book value. An empirical comparison of intrinsic valuation methods for. Also, the residual income and the terminal value are discounted and the sum of these components derives the equity value for the bank. Check out the questions in this quiz on common stock valuation and growth as a reference before viewing the lesson.
The calculated values were then compared to the respective stock. Thats near the low end of the bank industry, where the average stock trades for 15. Bank valuation under this model can be interpreted as determining the value of a call option on the value of. Additional questions concerning valuation methods 32. Book value per share is a good measure to value bank stocks. The method generally involves the analysis of various financial information. Insurance companies agencies, underwriters, ancillary.
Introduction the process of assigning a value to a share of common stock involves more art than science or at. The common free cash flow on equity fcee method is highly valid for bank valuation, also because it reflects the fact that banks can create value from the liability. Even with equity valuation, we have a secondary problem. Pdf bank valuation methods differ from valuation methods for. Stock valuation overview, types, and popular methods. I n a best selling book on the valuation of c ompanies written by three consultants koller et al.
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