1. You have been asked to compare two banks Suntrust Banks and Southwest Banks. Suntrust has a market value of equity of $ 1.5 billion, a book value of equity of $ 750 million, and is expected to earn 20% as itsreturn on equity. Southwest Banks has a market value of equity of $ 1.00 billion and a book value of equity of $ 750 million. Both firms are in stable growth, growing at 5% a year, and the same cost of equity.
   1. Assuming that Suntrust is correctly valued by the market, estimate the cost of equity for the bank. (15points)
   2. Using the cost of equity estimated in part a, estimate the return on equity that Southwest Banks is expected to earn in the future. (You can assume that Southwest Banks is correctly priced as well.) (15points)

\begin{tabular}{|l|l|c|} \hline 6 & \multicolumn{1}{|c|}{ Problem 1} & $1,500 \\ \hline 7 & SunTrust Market Value of Equity (\$M) & $750 \\ 8 & SunTrust Book Value of Equity ($M) & 20% \\ 9 & SunTrust Expected ROE & $1,000 \\ \hline 10 & Southwest Market Value of Equity (\$M) & $750 \\ 11 & Southwest Book Value of Equity ($M) & 5% \\ 12 & Growth for both banks & \\ \hline 13 & & \\ 14 & Price to Book ratio for SunTrust & \\ 15 & Price to Book ratio for Southwest & \\ 16 & & \\ \hline 17 & Part a & \\ \hline 18 & SunTrust Cost of Equity & \\ 19 & & \\ \hline 20 & Part b & \\ 21 & Southwest ROE & \\ \hline \end{tabular} \begin{tabular}{|l|l|c|} \hline 6 & \multicolumn{1}{|c|}{ Problem 1} & $1,500 \\ \hline 7 & SunTrust Market Value of Equity (\$M) & $750 \\ 8 & SunTrust Book Value of Equity ($M) & 20% \\ 9 & SunTrust Expected ROE & $1,000 \\ \hline 10 & Southwest Market Value of Equity (\$M) & $750 \\ 11 & Southwest Book Value of Equity ($M) & 5% \\ 12 & Growth for both banks & \\ \hline 13 & & \\ 14 & Price to Book ratio for SunTrust & \\ 15 & Price to Book ratio for Southwest & \\ 16 & & \\ \hline 17 & Part a & \\ \hline 18 & SunTrust Cost of Equity & \\ 19 & & \\ \hline 20 & Part b & \\ 21 & Southwest ROE & \\ \hline \end{tabular}