Please provide solution with explaination
finance_questions_123.docx
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Instructions:
The most recent annual report (SBUX_2015_10K.pdf), which was filed with the SEC on
November 12, 2015, is available on Blackboard. The document SBUX_data_20150916.docx has
the data that I used in my valuation of Starbucks dated September 16, 2015 and which is in the
Excel file Valuation_SBUX.xlsx. That valuation was based on the 2014 Starbucks annual report.
Your task is to update the valuation using the most recent annual report and the updated
financial market data in the file SBUX_data_20160914.docx. Be aware of the fact that Starbucks
had a 2 for 1 stock split in March 2015.
QUESTION 1
What has been the stock market performance of Starbucks over the last six months? Over the
past year?
QUESTION 2
Do a DCF valuation of Starbucks using the discounted FCFF approach, as in tabs 2 and 3 of the
Valuation_SBUX.xlsx spreadsheet. In particular, you should answer the questions below. If an
item below states that a certain estimate is to be used, e.g., 40% for the reinvestment rate,
then of course no explanation is required on your part unless you disagree with my suggestion,
in which case you should briefly justify your alternative inputs.
a. “Current year (Year 0) NOPAT” – Please update this and explain how this is computed from
the financial statements that are provided to you.
b. “Current Year (Year 0) Invested Capital” – Please update this and explain how this is
computed from the financial statements that are provided to you.
c. “Current year (Year 0) book value of interest-bearing debt” – Please update this and explain
how this is computed from the financial statements that are provided to you.
d. “Growth in NOPAT in the high growth stage” – Look at the bottom screen shot on page 3 in
SBUX_data_20160914.docx, which is from Bloomberg. It has the long term growth estimates
from analysts dated September 14, 2016. As you can see, analyst estimates are in a range of
18% to 20%. Please note that (1) the range was 15% to 18% until recently and (2) analysts are
known to be optimistic as a group. Please pick a growth rate that you think makes sense as your
“Growth in NOPAT in the high growth stage”.
Please note that the most recent 10K is quite dated and reflects information as of September
2015. To be able to value the stock as of today (rather than a year ago), I suggest you modify
the spreadsheet as follows. Notice that the EPS in the last 10K was $1.84 per share, while the
EPS for 2016 is predicted to be $1.89 per share (from page 3 of the document
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SBUX_data_20160715.docx). Thus the implied growth rate for Year 1 is only 2.7% and this
should be hard coded in the spreadsheet (cell H52 in tabs 2 and 3).
e. “Reinvestment Rate” – I used the estimate from tab 1 of the Valuation_SBUX.xlsx
spreadsheet, for large restaurants. I suggest that you keep this estimate.
f. “Steady-state NOPAT Growth” – Please explain what the 4% represents.
g. “Steady-state ROI” – I set this equal to WACC. I suggest you leave this as is.
h. “Current year (Year 0) Book Value of Equity Per Share” – There are several places to get this
from. Looking at the balance sheet on page 48, there are 1485.1 million shares issued and the
total book value of equity is $5818 million. Divide the book value of equity by the number of
shares to obtain book value per share.
i. “Current Stock Price” – Use the current stock price.
j. “Number of Shares Outstanding (millions)” — Please update this with the number of shares
issued from the balance sheet.
k. “Total Value of Preferred Stock” – There is no preferred stock so leave this number as is.
l. “Cash, Short-term Investments & Non-Operating Assets” — Please update this and explain
how this is computed from the financial statements that are provided to you.
m. “Risk-free rate (yield on 30-year U.S. govt. bond)” – From Yahoo.com. Please update this
with the data in the file SBUX_data_20160914.docx.
n. “Raw Beta” – Please update this with the data in the file SBUX_data_20160914.docx.
o. “Risk premium on U.S. market (rm – rf)” – I suggest you use leave this as is at 5.5%.
p. “Cost of Debt” – The estimated cost of debt for Starbucks is from Bloomberg. Please update
this with the data in the file SBUX_data_20160914.docx.
q. “Effective Tax Rate” – I suggest that you leave this at about 38%.
r. What is the final valuation of the equity on a per share basis? Please note: this is the value
per share in cell I78. How does it compare to the market price?
Please provide a printout of tabs 2 and 3 of the valuation spreadsheet. Do not forget!
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QUESTION 3
Do a DCF valuation of Starbucks using the discounted FCFE approach, as in tabs 4 and 5 of the
Valuation_SBUX.xlsx spreadsheet. In particular, you should answer the following questions.
a. “Current year (Year 0) EPS0, $” — Please update this using the financial statements that are
provided to you (income statement page 46 of the annual report).
b. “Year 1 Consensus EPS Forecast (FY1), $” – Look at page 3 of SBUX_data_20160914.docx. It
has the consensus analyst earnings estimates dated September 14, 2016. You should update
the number using the analyst forecasts in the file SBUX_data_20160914.docx.
c. “Year 2 Consensus EPS Forecast (FY1), $” – Look again at page 3 of
SBUX_data_20160914.docx, which has the consensus analyst earnings estimates dated
September 14, 2016. You should update the number using the analyst forecasts in the file
SBUX_data_20160914.docx.
d. The other inputs are straightforward.
e. What is the final valuation of the equity (value per share in cell I65)? How does it compare to
the market value?
Please provide a printout of tabs 4 and 5 of the valuation spreadsheet.
QUESTION 4
Based on your four discounted cash flow valuations, is Starbucks a buy, a sell or a hold?
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