Question

1.Use the given data for Nordstrom to estimate the values for a comparable department store, Macy’s.

Nordstrom:

Stock price per share (July 2018)	$50.71
Earnings per share (quarter ending July 2018)	$0.97
Book value per share (quarter ending July 2018)	$6.81

The actual price of Macy’s stock as of July 2018 was $36.54.

What does this imply about the valuation techniques considered in this problem?

The price-to-book method yields a value within 25% of the actual value, whereas the price-to-earnings method yields a value that exceeds 25% of the actual value.

The price-to-earnings method yields a value within 25% of the actual value, whereas the price-to-book method yields a value that exceeds 25% of the actual value.

Both methods yield a value within 25% of the actual value.

Neither method yields a value within 25% of the actual value.

2. How much principal amount does an investor need to have in order to gain $110 in simple interest in an account that has an interest rate of 9% per month over 4 months? Round your answer to the nearest cent.

Answer 1

Answer (a) : Price to book ratio = Market price per share / Book value per share = 50.71 / 6.81 = 7.45

Price to earning ratio = Share price / Earning per share = 50.71 / 0.97 = 52.28

25% of actual value = 25% of 36.54% = 9.135

* Price to book ratio is less than 25% of actual value.

* Price to earning ratio is more than 25 % of actual value.

Hence answer is The price-to-book method yields a value within 25% of the actual value, whereas the price-to-earnings method yields a value that exceeds 25% of the actual value.

Answer (b) : Simple interest = Principal amount × Rate of interest × time

Principal amount = Simple interest / Rate of interest × time = 110 × 9 × 4 / 100 = 39.6

$39.60 should be invested in order to gain $110 in simple interest with interest rate 9% per month over 4 months.

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