Development of Bank Value Model

Finance specialists predict a new wave of M&A activities in banking sector. The integral part of any M&A transaction is a valuation of an entity. Thus, bank valuation is one of the most actual issues in today’s financial business. Some valuation specialists consider that a valuation of a financial institution can be undertaken mainly using earnings-based methods, in particular, Discounted Cash Flow (DCF) approach. However, we face some difficulties while using this method for valuation of Latvian commercial banks. One of them is the determination of discount rate, because the models of discount rate calculation were devised by foreign specialists for using in developed countries with mature stock markets. The goal of the paper is to develop a mathematical model as an alternative to existing company’s valuation models. As a proxy for a bank’s value the market capitalization was used. Taking into account, that shares of only few banks of Baltic States are quoted in the stock exchange, the statistical base was formed from data about European banks