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Comerica Incorporated: The Valuation Dilemma Case Solution & Answer

Comerica Incorporated: The Valuation Dilemma Case Solution

Introduction

The following case study aims to emphasize over the importance of banks in the capital market and society, and then outline how they operate and what are the core functions of the bank. The Case Study of Financial Analysis of (CMA) is based on evaluating that whether it is potential to invest in Comerica Incorporated share for Jack Wilson’s company, Darden Capital Management (DCM). In September 2008, Comerica Incorporated CMA’s stock price was $33.36, which has dropped for the first time in last 12 months’ history. Finally, the case study reflects Comerica Incorporated’s operating model achievability during the financial crisis of 2007 and 2008, which also affects the share price.

Problem Statement

In September 2008, in the middle of the crisis; a manager with the student-run Darden Capital Management fund was given the responsibility to evaluate whether Comerica Incorporated, a regional bank centered in Dallas, Texas, is a better applicant for presence in his portfolio or not.He  needs to evaluate the bank to announce whether the market sees a decline in the market value or could there be any further price decline justified.He needs to consider all the factors that affect the value of the bank itself and the current market conditions. This situation can be explained as:

  • Analyze the valuation of a bank during a crisis.
  • Realize the key financial statements, like: balance sheet and income statement for a bank and how they could vary from other companies.
  • Realize the key drivers of bank’s value like metrics for profitability, credit quality, liquidity, & capital.(Allayannis, 2009)

Critical Analysis

Question 1

Banks are also called the financial intermediaries. Primarily, all banks gather temporarily idle money for lending to others and investing it into a profitable business, which brings the gain in the form of return, profit & deviants, etc. However, due to the variety of resources of money & the diversity in lending and investment operations;this is the primary source of revenue.The bank is utilizing the funds into other activities like a corporate bank, a commercial bank, an investment bank, options, and futures markets, trading of foreign exchange, insurance and consumer finance in order to earn the interest revenue.

Importance of banks for capital markets

Banks have high importance in the capital markets and strong institutions,for example: banks are required to do better in the markets, and well-operating capital markets require the banks to be able to obtain loans on credit. Satisfaction regarding the improvement is must in order to succeed. There were some moments in history where capital markets had crashed and banks had backed the investors, which had led towards the recovery of capital.

Importance of banks in society

Banks create value from their customers, suppliers, employees, shareholders and other investors. Banks help their customers in financing, investments producing secure payments and asset management. They build comfortable lives for their customers, as the banks facilitate the people’s growth by assisting them in fulfilling their dreams. Life without banks is unbelievable, and for a society to survives and develop; bank is the core necessity.

Question 2

Book Value per Share: Book value per share is determined through the total equity divided by the number of shares outstanding at this time. The book value per share increased in 2007, March 2008, and in June 2008 – the book value per share had decreased by 1.16, showing a loss of 1.16 per share.

Tangible Book Value per Share: The tangible book value per share is determined through the tangible assets divided by the total number of shares, which shows the value of tangible itemsopen for one share. This eliminates the intangible items that could not be liquidated. The outcomes of CMA for this, are matched with book value per share and the loss per share of three months, which is also $1.16 per share………………………

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