Now assume that you are comparing the price-to-book ratios of the 13 largest banks in the United States in 2000. The following table summarizes the price-to-book ratios and the returns on equity earned by these firms:

a. If you were valuing SunTrust Banks relative to these firms, would you expect it to have a higher or lower price-to-book ratio than the average for the group? Explain why.

b. If you regress price-to-book ratios against returns on equity, what would your predicted price-to-book ratios be for each of these companies?

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Company Name PBV ROE Wachovia Corp. 2.05 18.47% PNC Financial Serv. 2.54 21.56% SunTrust Banks 1.91 15.35% State Street Corp. 6.63 19.52% Mellon Financial Corp. 4.59 23.95% Morgan (J.P.) & Co. 1.74 19.39% First Union Corp. 1.52 19.66% FleetBoston Fin'l. 2.25 20.15% Bank of New York 7.01 25.36% Chase Manhattan Corp. 2.60 24.60% Wells Fargo 3.07 17.72% Bank of America 1.69 19.31% Bank of Montreal 1.23 18.08%