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The average P/E ratio of the two banks was 13.08. The
average P/Eqt ratio was 1.56. Mr. Hitt felt that FNBW was a
better performer than these banks, so he used a P/E ratio of 14
and a P/Eqt ratio of 1.6. Applying these numbers to FNBW’s 1992
earnings of $1,423,000 and stockholder equity as of December 31,
1992, of $11,249,000 resulted in prediscount values per share for
FNBW of $199.22 and $179.98, respectively. Mr. Hitt applied a
minority interest discount rate of 32 percent based, according to
him, on data from Mergerstat Review. He also applied a lack of
marketability discount of 45 percent, which he obtained from
examining sales of restricted stock. His final value based on
the P/E-ratio method was $74.51, and his final value based on the
P/Eqt-ratio method was $67.31.
Capitalized Future Earnings
In this method, essentially the same as the earnings-based
method used for JFI, Mr. Hitt sought to estimate the income that
FNBW would generate in the future and then to calculate its
present value. The earnings stream was projected by first
applying a 4-percent annual growth rate to the asset base, to
calculate average assets in each year for the next 5 years.
Although FNBW’s ROA for 1992 was 1.41, Mr. Hitt applied the
historical ROA figure of 1.19 to each of the five yearly asset
figures. Also, Mr. Hitt made certain assumptions about the
amount of income that FNBW would pay to shareholders as
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