Stock Valuation of Macys, Inc.

Exposition of Gordon Model Macys stock value can be evaluated using the discounted cash flow asset valuation model, shown in exhibit 11. Exhibit 11: Exposition of Gordon Model Basic Asset Valuation Model: P0 = CFt / (1+k)t t=1 CFt - the cash flow during time period t k- the required rate of return. The model assumes that the current value of an asset is equal to the sum of PV of all future cash flows. If future cash flows grow at a constant rate g then, CFt = CF0 (1+g)t Where CF0 represents the current cash flow (1+g)t/(1+k)t (1+g)/(k-g) t=1 Assuming that the rate of return (k) is greater than the growth rate (g), the Gordon Constant Growth Model is obtained by substitution as shown below: P0 = CF0 (1+g)/ k-g The cash flow (CF0 ) for the most recent fiscal year ending in January 2014, the growth rate (g), and the required rate of return (k) are the values needed to use the Gordon Model.

Estimating Future Cash Flows for Macys Estimating future cash flows for Macys requires the current cash flow,CF2013, measured using either earnings or dividends per share. Using earnings per share (EPS) as a measure of cash flow is more accurate than using dividends per share because it takes net income of the company and payment of dividends to its stockholders into account and therefore represents the amount that the company can use for investment over the next fiscal year. Dividends are not as reliable as a measure of cash flow because it only measures the amount that the company pays to its stockholders for each share of stock. Current cash flow, CF2013, for the most recent fiscal year ending in January 2014 is equal to $3.91. The current cash flow is determined by summing the known EPS values for the first three quarters with the estimate value for the fourth quarters (Q1 $0.55 + Q2 $0.72+ Q3 $0.47 + Q4 wsj estimate $2.17 = $3.91). Exhibit 11 shows Macys past and estimated future EPS and DPS values from 2004-2015
Exhibit 12: M Earnings Per Share (EPS) and Dividends Per Share (DPS), Fiscal 2004-2015 Fiscal Year EPS ($) DPS ($) 2004 1.93 0.265 2005 3.22 0.51 2006 1.81 0.509 2007 1.97 0.518 2008 (11.34) 0.529 2009 0.78 0.20 2010 1.98 0.20 2011 2.92 0.35 2012 3.24 0.80 2013 3.91 0.86 2014 4.32 0.95 2015 4.88 1.06 Source: 1999-2013 data from M annual income statements from mergentonline.com. 2013 EPS data are analysts estimates at wsj.com

The Macys annual income statements give the EPS and DPS values using net EPS-basic values and dividends per common share. Exhibit 13 graphs the EPS values over time from fiscal 2004-2015 and exhibit 14 graphs the DPS values from fiscal 2004-2015. Exhibit 13: EPS for M, 2004-2015

Exhibit 14: DPS for M, 2004-2015

Graphs generated from Microsoft Excel using EPS, DPS values

EPS and DPS values are used to calculate possible g values over different time periods. Possible g values are found by deriving the regression estimate of the logarithm of earnings over time [(EPSt = EPS0(1+g)t )] therefore [(ln(EPSt) = ln(EPS0) + ln(1+g)t)]. The estimated coefficient on time, t is equal to the natural logarithm of (1+g). Exhibit 15 shows possible growth rate values for Macys over different time periods. Exhibit 15: Possible Growth Rate Values (%) for M Cash Flow Period (In Fiscal Years) Growth Rate, g (%) (EPS) 2004-2007 (EPS) 2009-2015 (EPS) 2010-2015 (EPS) 2011-2015 (EPS) 2009-2013 (DPS) 2004-2009 (DPS) 2010-2015 (DPS) 2011-2015 5 Year Estimate -5.1 30 18.3 14.1 45 -3.6 38.5 26.9 11.9

Possible g values estimated by regressing a time trend on the natural logarithm of EPS or DPS. 5-year estimate found from analyst estimates from finance.yahoo.com

Exposition of CAPM Model The Capital Asset Pricing Model (CAPM) is used to assess the required rate of return, k of Macys. The CAPM model links non-diversifiable risk to required return, k. The

beta coefficient, j is used to measure the non-diversifiable risk of Macys. Exhibit 16 shows what constitutes the CAPM model.

Exhibit 16: Exposition of CAPM Model kj = krf + j *(km krf) where: kj = required rate of return krf = risk-free return km =return on market portfolio j = stock beta coefficient Estimating Risk-Free Return The risk free return, krf can be measured using U.S Treasury Bills or the return on long-term government bonds since the government is unlikely to default on a bond. Exhibit 17 shows the 15-, 25-, and 35-year averages for the return on government bonds and U.S Treasury bills. Exhibit 17: Rates of Return (%) for 15-, 25-, and 35-year Periods
15-year period 2.5 1998-2012 25-year period 5.9 3.7 9.7 1988-2012 35-year period 7.1 5.2 11.3 1978-2012 Source: Data compiled by averaging the annual returns from Stocks, Bonds, Bills, and Inflation Yearbook published by Ibbotson Associates at Union Schaffer Library Reference Desk, Table 2-2, C-4, C-6 and C-1 Estimating Market Return to Equities Long-term government bonds 4.8 U.S. T-bill Large-company stocks 4.5

The market return, km, is can be found using the S&P 500s annual rates of return for largecompany stocks. The market return represents the average return for all companies as shown in exhibit 17 above. Estimating the Beta for M stock The beta for Macys stock is a measure of non-diversifiable risk, which is attributable to market factors that affect all firms such as the strength of the economy or inflation. The beta coefficient for the entire market equals 1.0 and all other betas are viewed in relation to this value. From yahoo.finance.com, the beta for Macys is given at beta = 0.61. To estimate possible k values, both beta values must be used because the estimated beta value may be skewed due to the recent government shutdown in October. Estimates of Required Return for M Stock: The required rate of return is equal to the risk-free rate plus beta times the market risk rate plus beta times the risk free rate. Exhibit 18 displays the possible required return values using betas of 0.61 and 1.0 and the risk-free and market return values from exhibit 17.

Exhibit 18: Possible Required Return Values (%) for M Assuming Beta = Holding Period of risk-free Required Rate of 0.61: rate krf and market return km Return, k (%) Treasury Bill Treasury Bill Treasury Bill L-T Government Bond L-T Government Bond L-T Government Bond Assuming Beta = 1.0: Treasury Bill Treasury Bill Treasury Bill L-T Government Bond L-T Government Bond L-T Government Bond 15-year 25-year 35-year 15-year 25-year 35-year 15-year 25-year 35-year 15-year 25-year 35-year 3.7 7.4 8.9 4.6 8.2 9.7 4.5 9.7 11.3 4.5 9.7 11.3

Estimates of M Share Value To estimate Macys share price using the Gordon Model, the CF2013 value will be $3.91. Different values of g from exhibit 15 and different values of k from exhibit 18 will be used. Exhibit 19 shows possible stock values of M using different k and g values. Note that the required return, k must be greater than the growth rate, g to use the Gordon Model. Exhibit 19: Possible stock values for M Possible k values (%) 7.4 $279.28 $355.45 8.2 $177.73 $205.79 $661.67 8.9 $134.83 $150.38 $300.77 11.3 $73.77 $78.20 $105.68

Possible g values (%) 6.0 6.3 7.6

The market value for Macys is currently $50.25 from quotes.wsj.com, which is close to some of the possible stock values in exhibit 19. The estimated stock values are higher than Macys current price indicating that the Gordon Model may not take into account economic factors that affect the share values. The recent government shutdown and the fact that U.S economy is still recovering from the recession directly affects Macys business because consumers may be scared out of spending money and want to save more. Macys should continue its slow and steady growth path since consumer confidence and disposable income continues to rise steadily (S&P Industry Survey). The economy continues to improve and consumers are receiving higher wages which will fuel consumer spending and bring profits to the company. The companys share price is also

Appendix All accounting data is from morningstar.com and mergentonline.com looking at annual balance sheets and income statements from most recent fiscal years. Macys Balance Sheet and Income Data for Fiscal Years 2010-2013 ($ millions) 2013 2012 2011 2010 Total current assets 7,876 8,777 6,899 6,882 Total current liabilities 5,075 6,263 5,065 4,454 Total assets 20,991 22,095 20,631 21,300 Total liabilities 14,940 16,162 15,101 16,599 Long-term debt 6,806 6,655 6,971 8,456 Inventories 5,308 5,117 4,758 4,615 Accounts receivable, net 371 368 392 358 Shareholders Equity 6,051 5,933 5,530 4,701 Net sales 27,686 26,405 25,003 23,489 Operating profit 11,148 10,667 10,179 9,516 Interest expense 437 447 579 562 Net income from total 1,335 1,256 847 350 operations Cost of Goods Sold 16,538 15,738 14,824 13,973 Kohls Balance Sheet and Income Data for Fiscal Years 2010-2013 ($ millions) 2013 2012 2011 2010 Total current assets 4,719 4,775 5,645 5,485 Total current liabilities 2,535 2,590 2,710 2,390 Total assets 13,905 14,094 13,564 13,160 Total liabilities 7,857 7,586 5,462 5,307 Long-term debt 2,492 2,141 2,141 2,141 Inventories 3,748 3,199 3,036 2,923 Accounts receivable, net 537 1,205 2,277 2,267 Shareholders Equity 6,048 6,508 8,102 7,853 Net sales 19,279 18,804 18,391 17,178 Operating profit 6,990 7,179 7,032 6,498 Interest expense 329 303 141 134 Cost of Goods Sold 12,289 11,625 11,359 10,680

Nordstrom Balance Sheet and Income Data for Fiscal Years 2010-2013 ($ millions) 2013 2012 2011 2010 Total current assets 5,081 5,560 4,824 4,054 Total current liabilities 2,226 2,575 1,879 2,014 Total assets 8,089 8,491 7,462 6,579 Total liabilities 6,176 6,535 5,441 5,007 Long-term debt 3,124 3,141 2,775 2,257 Inventories 1,360 1,148 977 898 Accounts receivable, net 2,129 2,033 2,026 2,035 Shareholders Equity 1,913 1,956 2,021 1,572 Net sales 12,150 10,880 9,700 8,573 Operating profit 1,345 1,249 1,118 834 Interest expense 162 132 133 148 Cost of Goods Sold 7,432 6,592 5,897 5,328

Financial Ratios Calculated: Current ratio = total current assets/total current liabilities Quick ratio = (total current assets inventories)/total current liabilities Average age of inventory = 365/(cost of goods sold/inventories) Average collection period = accounts receivable/(net sales/365) Debt ratio = total liabilities/total assets Long-term debt ratio = long-term debt/total assets Interest coverage ratio = operating profit/interest expense Gross margin = (sales cost of goods sold)/sales Operating margin = operating profit/sales Net profit margin = earnings available for common stockholders/sales Total asset turnover = sales/total assets Return on assets = earnings available for common stockholders/total assets Financial leverage (FLM) = total assets/common stock equity

Return on equity = (net profit margin)*(total asset turnover)*(FLM)