-How could you profit if you see these rates on the spot exchange market? e$/£ = 1.6; e$/Fr = 0.6; eFr/£ = 3.2. Question options:
1) Use Fr to buy $; then use $ to buy £; last use £ to buy Fr
2) Use $ to buy Fr; then use Fr to buy £; last use £ to buy $
3) Use £ to buy $, then use $ to buy Fr, last use Fr to buy £.
4) Use Fr to buy £, then use £ to buy $, last use $ to buy £.
5) All of the above.
-When many more international students come to the United States to pursue a bachelor's or a graduate degree, how does this event affect the exchange rate of US dollar? Question options:
1) US dollar is appreciated.
2) US dollar is depreciated.
3) The event does not affect the exchange rate of US dollar.
4) It is impossible to determine.
-How could you profit if you see these rates on the spot exchange market? e$/£ = 1.6; e$/Fr = 0.6; eFr/£ = 3.2. Question options:
1) Use Fr to buy $; then use $ to buy £; last use £ to buy Fr
2) Use $ to buy Fr; then use Fr to buy £; last use £ to buy $
3) Use £ to buy $, then use $ to buy Fr, last use Fr to buy £.
4) Use Fr to buy £, then use £ to buy $, last use $ to buy £.
5) All of the above.
-When many more international students come to the United States to pursue a bachelor's or a graduate degree, how does this event affect the exchange rate of US dollar? Question options:
1) US dollar is appreciated.
2) US dollar is depreciated.
3) The event does not affect the exchange rate of US dollar.
4) It is impossible to determine.
Related questions
Short- and Long-Run Exchange Rate Risk Exercise
Worksheet (v1.2)
In this exercise you are asked to choose a currency in which it is assumed you have foreign exchange exposure both in trade (short-run) and investment (long-run). In this exercise you are asked to find both spot and forward exchange rates for a chosen currency and also inflation rates associated with that currency. You are encouraged to read through the exercise first before choosing your currency to ensure the requested data is accessible via the links provided.
Short-Run Exchange Rate Risk
Assume you have a trade receivable denominated in a foreign currency of your choice that is payable to you by your customer in 6 months. At the current spot rate the trade receivable is worth the equivalent of US$5,000,000. To find the current spot rate for the chosen currency pair go to http://www.hsbcnet.com/gbm/fxcalc-disp.[1] Enter 5,000,000 in the âConvertâ box, United States dollar in the âFrom:â box, and your chosen currency in the âTo:â box. Click on âGoâ for the spot rate, which will be expressed in European terms, that is, units of foreign currency per one US dollar. Enter the name of the chosen currency, the date the site is accessed, and the spot rate in European terms in the table below.
To find a 180 day forward rate for the currency pair, go to http://www.hsbcnet.com/gbm/fwcalc-disp#. For âAmountâ you can just enter 1 and enter US dollars in the âBuyâ box and the foreign currency in the âSellâ box. For âValue Dateâ enter â6 Monthsâ and click âGoâ for the forward rate. (Clicking on the Inverse box will switch the rate from European to American terms.) Enter the one-year forward rate in the table below. Make sure the forward rate is expressed in the same way as the forward rate, that is, in European terms.
| Foreign Currency | Date | Current Spot Rate in European terms: FX per 1 US dollar | Six -Month Forward Rate in European terms: FX per 1 US dollar |
Based on the data above, answer the following questions:
| At the current spot rate how much in the foreign currency are you owed in 6 months? Assuming you fully hedge your FX exposure in the forward market, how many US dollars will you receive in 6 months? Is the foreign currency selling in the forward market at a premium, i.e. it appreciates relative to the spot rate, or a discount, i.e., it depreciates relative to the spot rate? Provide numbers to support your answer. |
Long-Run Exchange Rate Risk
Assume you have undertaken a 3-year investment abroad with expected cash flows denominated in your chosen currency. At the current spot rate those cash flows are expected to provide a positive net present value (NPV) in US dollar terms. Based on relative purchasing power parity you are asked to estimate future spot rates over the next three years based on comparative inflation data.[2] With that data complete the table below.
| S0 = Current Spot Rate in European Terms (Foreign currency per US dollar) | E(St) = Expected Exchange Rate Spot Rate in t Years in European Terms (Foreign currency per US dollar) | hUS= Annual Inflation Rate in the United States | hFC = Annual Foreign Country Inflation Rate |
Using the data above and textbook equation (18.3) E(St) = S0 â [1 + (hFC - hUS)]t and assuming the estimated inflation rate in Year 1 also holds for Years 2 and 3, please respond to the following:
| Based on relative purchasing power parity, estimate S1. Based on relative purchasing power parity, estimate S2. Based on relative purchasing power parity, estimate S3. Based on relative purchasing power parity, has the foreign currency appreciated or depreciated against the US dollar? Explain. Based on relative purchasing power parity, has the NPV of the investment project increased or decreased in US dollar terms? Explain. |
[1] Please note currencies are grouped according to their region: Americas (where the United States dollar may be found), Asia-Pacific, Europe, and MENA. Please advise your instructor should this or any other link in the assignment be broken.
[2] Sources of Inflation data include http://stats.oecd.org/ for OECD countries and http://data.worldbank.org/indicator/FP.CPI.TOTL.ZG at the World Bank site. It is viewed important to be consistent in the definition and source of inflation numbers for the US and the other currency that you use for the relative PPP equation. The most basic definitions of inflation are consumer price index (CPI), producer price index (PPI), and GDP deflator. Estimates of the next yearâs inflation are preferred but it is also common to use the past yearâs inflation as the best estimate of next yearâs and subsequent yearsâ inflation. You are encouraged to share any useful websites for this data you find with the class.
International Research Journal of Applied Finance ISSN 2229 â 6891
Vol. VI Issue â 8 August, 2015 Case Study Series
A Stock Valuation Case: An Application of the âMethod of Comparablesâ for Macyâs Shares
Halil D. Kaya* ,Julia S. Kwok
Abstract
The primary focus of this case is the application of the âMethod of Comparablesâ in the estimation of the value of a security. An investment decision will be made based on the comparison of the selling price and the estimated value. A security will be good for purchase if the estimated value is higher than the market price. This method utilizes basic financial ratios that are commonly provided by financial web sites. First, using Yahoo Finance website, the pricing, sales, book value of equity and shares outstanding data are collected for both the target firm and the competitor firms. Then, the pricing multiples (i.e. price earnings ratio, price to sales ratio and price to book ratio) of the competitors are calculated. After that, those multiples along with the target firmâs earnings, sales, book value and shares outstanding data are used to estimate target firmâs share value. The case also examines the impact of treating ânegativesâ in the data. Students will learn that replacing negative earnings with zeros tend to induce less bias in target firmâs value estimation than excluding the ânegativeâ data altogether.
Introduction
March 14, 2015 was a sunny day. Mary took advantage of the nice weather to have lunch at the Mall. On her way back to work, she walked by Susanâs investment office. Susan was Maryâs college roommate. They both liked shopping together to find new fashionable clothes. Looking at her watch, Mary realized she had half an hour to spend. She thought she would drop by and say hello to Susan.
The Performance of Macyâs
âHi, Susan, how are you?â How is your business?â said Mary. Susan was a recent finance graduate. Susan replied, âI am doing fine. Thank you. After so many years, the market is still recovering from the mortgage crisis; many investors have been buying back stocks that they have sold during the crisis. What are you up to?â âI want to start my investment in securities, too. I have a couple thousand dollars, would Macyâs be a good stock to invest in now? That was our favorite store to shop among all of the department stores,â Mary exclaimed. She added, âAlso, I read from Motleyâs Foolâs article on Macyâs today about its earnings per share growth for the last 16 quartersâ (Zahid Waheed, 2014).
In response to Maryâs questions, Susan checked the monthly adjusted returns of Macyâs in Yahoo Finance. She found that, since March 2010, Macyâs stock price had an average annual increase of 23.5% over the last 5 years. The stock rose from $19.98 to $57.38. Susan then told Mary that Macyâs was indeed a growing stock. She added that its success could be attributed to the omni-channel integration, e-commerce and magic selling strategies which allowed merging of sales channels, online shopping and better customer care. Since investment strategy 101 is to buy low, and sell high, given Macyâs stock price had been going up, Susan was not sure whether Macyâs was currently overvalued or undervalued by the market.
The Method of Comparables
Susan remembered her class lecture on the two types of valuation of stocks, namely absolute and relative evaluation. The absolute evaluation focuses on finding the intrinsic value of the security based on fundamentals. That involves more complicated models of discounting cash flows from dividends, operations and residual income.
On the other hand, relative evaluation is quick and easy to use. It assumes two similar securities should sell for one price in an efficient market, i.e. âLaw of One Price.â So an analyst can estimate its stock price by multiplying target companyâs specific earnings, sales and equity value data by the earning, sales and equity âper shareâ financial multiples of its competitors.
Since Mary was not familiarized with financial models, Susan decided to use the easy-toperform-and-analyze âComparables Methodâ to estimate the relative value of Macyâs stock.
The Financial Data
Dillards, JC Penney and Nordstrom were selected as competitors of Macyâs as they were all in retail department store business. Susan would need some financial data regarding these companies. She went to SECâs (i.e. Securities and Exchange Commission) website and downloaded these companiesâ most recent balance sheet and income statement data. Out of those statements, she knew that she would need the EPS (i.e. earnings per share), the sales number, the number of outstanding shares, and the book value of equity. She also knew that she would need the current share price for each company. After some work, she had found all the necessary information to run the analysis. Below were the data that she had gathered:
All data are in US$ except for the number of outstanding shares. The share price as of March 15, 2014 is shown in the first column. The âEarnings per shareâ is shown in the second column. The third column reports the book value of equity. The last column shows the number of outstanding shares.
| Firm | P ($) | EPS ($) | Sales ($) | BV of equity ($) | # of shares |
| Macy's | 58.58 | 3.93 | 27,931 mil. | 6,249 mil. | 378.3 mil. |
| Dillard's | 90.61 | 7.10 | 6,532 mil. | 1,992 mil. | 45.6 mil. |
| JC Penney | 8.71 | -5.57 | 11,859 mil. | 3,087 mil. | 249.3 mil. |
| Nordstrom | 61.33 | 3.77 | 12,166 mil. | 2,080 mil. | 194.5 mil. |
The Decision
Susan thinks that the following steps would be necessary to perform the analysis:
1.Based on the data above, calculate Sales per share, BV of equity/share values of all firms. Note that EPS is directly given.
2.Calculate P/E, P/Sales, and P/B for all of Macyâs competitors based on the data obtained.
3.Find the average of the P/E, P/Sales, and P/B multiples for the three competitors.
4.Multiply those averages calculated in step 3 with Macyâs EPS, Sales per share, and BV of equity/share values, respectively to get three value estimates for Macyâs shares.
5.The average of the three estimates would then be Susanâs best estimate of Macyâs value per share.
answer # 1-5 please
