Appendix A Starbucks Corporation (SBUX) -NasdaqGS 52.49

| June 11, 2016

Question
Using the following information and attachment answer the bottom question

Cost of debt
• The cost of debt is the effective rate that a company pays on its total debt
• It gives an idea as to the overall rate being paid by the company to use debt financing
• This measure is also useful because it gives investors an idea as to the riskiness of the company compared to others
• The higher the cost of debt, the higher the risk
Calculation:
• The book value of debt is calculated by adding up all the debt on the balance sheet (notes payable, current portion of LT debt and long-term debt
Starbucks:
• Interest expense= 64,100 million (income statement)
• Total book value of debt= 5,480,900 (balance sheet)
Cost of debt= 64.100 / 5,480,900= 1.16951
Cost of preferred stock
• Preferred stock is a special equity security that has properties of both equity and debt.
• Cost of preferred stock is the rate of return required by the holders of the company’s preferred stock
Calculation:
• It is calculated by dividing the annual dividend payment of the preferred stock by the preferred stock current market price
Starbucks:
• Starbucks has a 0 preferred stock on their balance sheet
Cost of common equity
• The return that stockholders require for a company

Calculation:
• Use the capital asset pricing model (CAPM) to calculate the required rate of return
• The formula is: cost of equity= risk-free rate of return + beta of asset x expected return of the market – risk free rate of return
Starbucks:
• Risk-free rate= U.S. 10 year bond= 2.17 (12/31/14)
o obtained the information from ww.treasury.gov/resource-center/data-chart-center/interestrates/pages/textview.aspx/data=yieldyear&year=2014
• Average market return 1950 – 2013= 7% (risk free rate of return also called market premium)
o Obtained from pages.stern.nyu.edu/-adamodar/new_home_page/datafile/histretsp.html
• Beta= 0.78 (Yahoo Finance)
2.17 + 0.78 (7-2.17)
2.17 + 0.78 x 4.83
2.17 + 3.77= 5.94%
Weighted average cost of capital
• As the WACC of a firm increases, and the beta and rate of return on equity increases, this is an indication of a decrease in valuation and a higher risk
• By taking the weighed average, we can see how much interest the company has to pay for every dollar it finances
Calculation:
• WACC= R=(1-tax rate)x R debt (D/D+E)+ R equity (E/D+E)
• (1-tax rate) x R debt (D/D+E) + R equity (E/D+E)
Starbucks:
• Tax rate= 32.02% in 2014 (average of 4 qtrs)
• Cost of debt (before tax) or R debt= 3.83%
• Debt (total liabilities for 2014)= 5,480,900 (balance sheet)
• Debt of equity or D+E 2014= 5,480,900 + 5,272,00= 10,752,900
• Cost of equity or R equity= 5.94%
• Equity= stock price x outstanding shares or e= (shares outstanding 1.50B x 52.63 stock price)= 78.945 billion
(1-.3202) x .0383 x (5.481 / 10.753) + .0594 ($78.945 / 10.753)
.6798 x .0383 x .051 + .0894 x 7.342
.0013 + .4361= 0.437

Answer with Excel Question
You will use the WACC as the discount rate to conduct capital budgeting analysis for a project that the
firm is considering and then decide whether it should be accepted or not which is “ Building a new
Building” for $1 million. If you do not have a number you need, research it and state your assumptions
that you used to get the missing number.

Appendix A

Starbucks Corporation (SBUX)
-NasdaqGS
52.49 0.20(0.38%) 4:00PM EDT
After Hours : 52.38 0.11 (0.21%) 6:42PM EDT
Add to Portfolio

Income Statement

Get Income Statement for:

View: Annual Data | Quarterly Data

All numbers in thousands

Period Ending

Sep 28, 2014 Sep 29, 2013

Sep 30, 2012

Total
Revenue

16,447,800

14,866,800

13,276,800

Cost of
Revenue

6,858,800

6,382,300

5,813,300

Gross Profit

9,589,000

8,484,500

7,463,500

Operating Expenses
Research
Development
Selling
General and
Administrative
Non
Recurring

6,086,800

5,655,800

5,126,500

2,784,100

(20,200)

Others

709,600

Total Operating Expenses

Operating Income or Loss

621,400

550,300

3,081,100

(325,400)

1,997,400

142,700

123,600

94,400

Income from Continuing Operations
Total Other Income/Expenses Net
Earnings Before Interest And Taxes
Interest Expense

3,223,800
64,100

(201,800)
28,100

2,091,800
32,700

Income Before Tax

3,159,700

(229,900)

2,059,100

Income Tax Expense

1,092,000

(238,700)

674,400

400

(500)

Minority Interest

Net Income From Continuing Ops

(900)

2,336,400

259,700

1,594,500

Discontinued Operations

Extraordinary Items

Effect Of Accounting Changes

Other Items

2,068,100

8,300

1,383,800

Non-recurring Events

Net Income
Preferred Stock And Other Adjustments

Net Income Applicable To Common Shares

2,068,100

8,300

1,383,800

Appendix B

Balance Sheet
View: Annual Data | Quarterly Data
Period Ending

All numbers in thousands

Sep 28, 2014 Sep 29, 2013 Sep 30, 2012

Assets
Current Assets
Cash And Cash Equivalents

1,708,400

2,575,700

1,188,600

Short Term Investments

135,400

658,100

848,400

Net Receivables

948,400

838,700

724,600

1,090,900

1,111,200

1,241,500

285,600

287,700

196,500

4,168,700

5,471,400

4,199,600

833,300

554,800

575,900

3,519,000

3,200,500

2,658,900

Goodwill

856,200

862,900

399,100

Intangible Assets

273,500

274,800

143,700

Inventory
Other Current Assets

Total Current Assets
Long Term Investments
Property Plant and Equipment

Accumulated Amortization

Other Assets

198,900

185,300

144,700

Deferred Long Term Asset Charges

903,300

967,000

97,300

10,752,900

11,516,700

8,219,200

2,244,200

1,939,500

1,699,600

794,500

3,437,800

510,200

Total Current Liabilities

3,038,700

5,377,300

2,209,800

Long Term Debt

2,048,300

1,299,400

549,600

Other Liabilities

392,200

357,700

345,300

1,700

2,100

5,500

5,480,900

7,036,500

3,110,200

Misc Stocks Options Warrants

Redeemable Preferred Stock

Total Assets

Liabilities
Current Liabilities
Accounts Payable
Short/Current Long Term Debt
Other Current Liabilities

Deferred Long Term Liability Charges
Minority Interest
Negative Goodwill

Total Liabilities

Stockholders’ Equity

Preferred Stock

Common Stock

700

800

700

5,206,600

4,130,300

5,046,200

Treasury Stock

Capital Surplus

39,400

282,100

39,400

Other Stockholder Equity

25,300

67,000

22,700

Total Stockholder Equity

5,272,000

4,480,200

5,109,000

Net Tangible Assets

4,142,300

3,342,500

4,566,200

Retained Earnings

Appendix C

Cash Flow
View: Annual Data | Quarterly Data
Period Ending

Net Income

All numbers in thousands

Sep 28, 2014 Sep 29, 2013 Sep 30, 2012
2,068,100

8,300

1,383,800

748,400

655,600

580,600

1,500

1,509,100

19,200

Operating Activities, Cash Flows Provided By or Used In
Depreciation
Adjustments To Net Income
Changes In Accounts Receivables
Changes In Liabilities
Changes In Inventories
Changes In Other Operating Activities

Total Cash Flow From Operating Activities

(79,700)
(2,149,000)

(68,300)

(90,300)

574,300

149,100

14,300

152,500

(273,300)

4,600

76,300

(19,700)

607,800

2,908,300

1,750,300

Investing Activities, Cash Flows Provided By or Used In
Capital Expenditures
Investments

(1,160,900)

(1,151,200)

(856,200)

362,300

362,300

47,800

Other Cash flows from Investing Activities

(19,100)

(622,300)

(165,600)

Total Cash Flows From Investing Activities

(817,700)

(1,411,200)

(974,000)

Financing Activities, Cash Flows Provided By or Used In
Dividends Paid

(783,100)

(628,900)

(513,000)

Sale Purchase of Stock

(618,900)

(340,900)

(312,500)

Net Borrowings

748,500

714,500

(30,800)

Other Cash Flows from Financing Activities

(84,200)

(111,000)

(59,000)

Total Cash Flows From Financing Activities

(623,300)

(108,200)

(745,500)

(34,100)

(1,800)

9,700

Effect Of Exchange Rate Changes

Change In Cash and Cash Equivalents

(867,300)

1,387,100

40,500

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