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You are trying to value CommerzBank, a small, privately owned bank, for an IPO, and...

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Accounting

You are trying to value CommerzBank, a small, privately owned bank, for an IPO, and are using the information that you have on SunClaims Bank, a publicly traded bank that you believe is fairly valued by the market, given its fundamentals. You have the following information on the two banks:

CommerzBank SunClaims Bank

Net Income (in millions) $80 $120

Book Value of Equity (in millions) $500 $1,000

Price/Book Value NA 1.25

Assuming that both banks are in stable growth, growing 2% a year, and have the same cost of equity, estimate a fair value for the equity of CommerzBank.

(Hint: based on SunClaims bank's ratios, use the stable growth P/B ratio formula to solve the cost of equity, then apply to the CommerzBank to find the fair value)

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