(SOLVED) A Use the CAPM to compute the required rate of

a. Use the CAPM to compute the required rate of return on common equity capital for
Starbucks.b. Using your projected financial statements from Integrative Case 10.1 for
Starbucks, derive the projected residual ROCE (return on common equity) for Starbucks for
Years +1through +5.c. Assume t
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required-rate-of
a. Use the CAPM to compute the required rate of return on common equity capital for
Starbucks.b. Using your projected financial statements from Integrative Case 10.1 for
Starbucks, derive the projected residual ROCE (return on common equity) for Starbucks for
Years +1through +5.c. Assume that the steady-state, long-run growth rate will be 3% in Year +6
and beyond. Project that the Year þ5 income statement and balance sheet amounts will grow by
3% in Year +6; then derive the projected residual ROCE for Year +6.d. Using the required rate
of return on common equity from Requirement a as a discount rate, compute the sum of the
present value of residual ROCE for Starbucks for Years +1 through +5.e. Using the required
rate of return on common equity from Requirement a as a discount rate and the long-run growth
rate from Requirement c, compute the continuing value ofStarbucks as of the start of Year +6
based on Starbucks' continuing residual ROCE in Year +6 and beyond. After computing
continuing value as of the start of Year þ6, discount it to present value at the start of Year +1.f.
Compute Starbucks' value-to-book ratio as of the end of 2012 with the following three steps: (1)
Compute the total sum of the present value of all future residual ROCE (from Requirements d
and e).(2) To the total from Requirement f (1), add 1 (representing the book value of equity as of
the beginning of the valuation as of the end of 2012). (3) Adjust the total sum from Requirement
f (2) using the midyear discounting adjustment factor.g. Compute Starbucks' market-to-book
ratio as of the end of 2012. Compare the value-to-book ratio to the market-to-book ratio. What
does the comparison suggest regarding the pricing of Starbucks' shares in the market:
underpriced, overpriced, or fairly priced? What investment decision does the comparison
suggest?h. Use the value-to-book ratio to project Starbucks' share value.i. If you computed
Starbucks' common equity share value using the dividends valuation approach in Integrative
Case 11.1 in Chapter 11, and/or the free cash flows to common equity valuation approach in
Integrative Case 12.1 in Chapter 12, and/or the residual income valuation approach in
Integrative Case 13.1 in Chapter 13, compare the value estimate you obtained in those cases
with the estimate you obtained in this case. You should obtain the same value estimates under
all four approaches. If you have not yet worked those prior cases, you would benefit from doing
so now.j. Use your forecast data for Year +1 to project Year +1 earnings per share. To do so,
divide your projection of Starbucks' comprehensive income available for common shareholders
in Year +1 by the number of common shares outstanding at the end of 2012. Using this Year +1
earnings-per-share forecast and using the share value computed in Requirement h, compute
Starbucks' value-earnings ratio.k. Using the Year +1 earnings-per-share forecast from
Requirement j and using the share price at the end of 2012, compute Starbucks' price-earnings
ratio. Compare Starbucks' value-earnings ratio with its price-earnings ratio. What investment
decision does the comparison suggest? What does the comparison suggest regarding the
pricing of Starbucks' shares in the market: underpriced, overpriced, or fairly priced? Does this
comparison lead to the same conclusions you reached when comparing value-tobook ratios with
market-to-book ratios in Requirement g? l. NFor this part only, assume Starbucks's long-run

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 growth beginning in Year +6 will be 1% rather than 3%. With a 1% growth rate, Year +6
comprehensive income will be $2,900 million. Compute Starbucks' price differential at the end of
2012. Compute Starbucks's price differential as a percentage of risk-neutral value. What dollar
amount and what percentage amount has the market discounted Starbucks' shares for risk?m.
Reverse engineer Starbucks' share price at the end of 2012 to solve for the implied expected
rate of return. First, assume that value equals price and that your earnings and 3% long-run
growth forecasts through Year +6 and beyond are reliable proxies for the market's expectations
for Starbucks. Then solve for the implied expected rateIn Integrative Case 10.1, we projected
financial statements for Starbucks for Years +1 through +5. In this portion of the Starbucks
Integrative Case, we use the projected financial statements from Integrative Case 10.1 and
apply the techniques in Chapter 14 to compute Starbucks' required rate of return on equity and
share value based on the value-to-book valuation model. We also compare our value-to-book
ratio estimate to Starbucks' market-to-book ratio at the time of the case to determine an
investment recommendation. In addition, we compute the value-earnings and price-earnings
ratios and the price differential, and we reverse engineer Starbucks' share price as of the end of
2012. The market equity beta for Starbucks at the end of 2012 is 0.75. Assume that the risk-free
interest rate is 3.0% and the market risk premium is 6.0%. Starbucks has 749.3 million shares
outstanding at the end of 2012, and the share price was $50.15.View Solution:
A Use the CAPM to compute the required rate of
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