Question

Bank Share Prices: If The Bank’s share price relative to book value was below its competitor banks by about 25%. Management made it clear that it believed the share price was undervalued, as opposed to low - valued due to a lack of investor confidence.

Make assumptions as to why the bank's share price was relative to book value less than competitors? give a recommendation

Make an assumption why it was undervalued was it due to investors confidence why? give a recommendation

was lower price relative to competitors vs undervalued?

Answer 1

These are the possible reasons share price of the entity is lower then its competitors, here under:

1.P/E, P/B, and EV/EBITDA Ratios

Valuations based on the dividend discount model involve determining the net present value of a company’s future dividend payments. The valuations calculated from a discount cash flow model seek to value a company today based on projected future cash flow. Other models take a more comparative approach, such as looking at P/E, P/B, and EV/EBITDA multiples, which can be benchmarked against other companies in the same or similar sectors.

For example, the lower a company's P/E ratio, the more value that stock is likely to provide. Meanwhile, companies with higher P/E ratios may not be overvalued if their earnings and revenue are growing at an amplified pace. Using valuation ratios can be an effective means to help determine if a stock is undervalued or overvalued relative to their competitors, but there are reasons to look beyond past performance numbers when evaluating whether a stock makes a good investment moving forward.

2. Price-to-Sales ratio (P/S)

Some companies don't have earnings, but do have revenues. In such cases, investors can revert to the price-to-sales (P/S) ratio. P/S ratio is figured dividing the current stock price by the sales per share. The current stock price can be found by plugging the stock symbol into any major finance website. The sales per share metric is calculated as dividing a company’s sales by the number of outstanding shares. A low P/S ratio would be considered "cheap," and a high P/S is "expensive."

3. Price-to-Dividend (P/D)

Price-to-dividend ratio is primarily used for analyzing dividend stocks. This ratio indicates how much you have to pay to receive $1 in dividend payments. This ratio is most useful in comparing a stock's value against itself over time or against other dividend-paying stocks.

40. Enterprise Value-to-Sales (EV/S) Ratio

Enterprise value is an alternative metric to market capitalization. The main difference is that it factors debt into the equation. Calculate EV by adding market cap to total debt (including preferred shares and minority interest) and subtracting cash and cash equivalents. Some favor this calculation in valuing companies that could be taken over, as debt and cash are primary factors in any M&A transaction.

5.Price/Earnings to Growth (PEG) Ratio

A stock's PEG ratio is a stock's price-to-earnings (P/E) ratio, divided by the growth rate of its earnings for a specified time period. It an important piece of data to many in the financial industry as it takes a company's earnings growth into account, and tends to provide investors with a bigger picture view of future profitability compared to the P/E ratio.

While a low P/E ratio may make a stock look like it's worth buying, factoring in the growth rate may tell a different story. The lower the PEG ratio, the more the stock may be undervalued given its earnings performance. The degree to which a PEG ratio value indicates an over or underpriced stock varies by industry and by company type.

The accuracy of the PEG ratio depends on the accuracy and reliability of the inputs.

SOME OF THE RECOMMENDATION FOR IMPROVEMENT SHARE PRICE AT MARKET HERE UNDER:

Investor Expectations

Business value can be real or expected. It may the reason that business fails to meet the expectations of its shareholder.

Supply and Demand

The faster a business grows, the more willing investors are to purchase its stock, and the more they are willing to pay for it. If the supply of stock remains the same while the demand for it increases, the stock price will go up.

Momentum

Nothing motivates investors to buy a stock more than a rising share price. Such situations can become self-fulfilling prophecies when a rising stock price attracts more investors, who are willing to pay more for the stock. Momentum traders buy stocks simply on the assumption that once an uptrend starts, it is likely to continue They don’t bother to find out why a price is moving up, or even what a business does.

Macro Econamic Condition

Bank may have to take proper decision taking consideration of its macro economic factors also. Unnessesory force to increase the price may lead to unetical practices, which may result of violation laws and regulation of the stock market.

Oprational Performance

Condition of its Assets( Loans/Advances) is very very important factor for bank. bank need to improve NPA ration positively.