Solved: In Integrative Case 10 1 we projected financial

statements

In 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 12 to compute Starbucks’
required rate of return on equity and share value based on the free cash flows valuation model.
We also compare our value estimate to Starbucks’ share price at the time of the case
development to provide an investment recommendation.
The market equity beta for Starbucks at the end of 2008 is 0.58. Assume that the riskfree
interest rate is 4.0 percent and the market risk premium is 6.0 percent. Starbucks has 735.5
million shares outstanding at the end of 2008. At the start of Year +1, Starbucks’ share price
was $14.17.

Required
Sensitivity Analysis and Recommendation
a. Using the free cash flows to common equity shareholders, recompute the value of Starbucks
shares under two alternative scenarios.
Scenario 1: Assume that Starbucks’ long-run growth will be 2 percent, not 3 percent as before,
and assume that Starbucks’ required rate of return on equity is 1 percentage point higher than
the rate you computed using the CAPM in Part a.
Scenario 2: Assume that Starbucks’ long-run growth will be 4 percent, not 3 percent as before,
and assume that Starbucks’ required rate of return on equity is 1 percentage point lower than
the rate you computed using the CAPM in Part a. To quantify the sensitivity of your share value
estimate for Starbucks to these variations in growth and discount rates, compare (in percentage
terms) your value estimates under these two scenarios with your value estimate from Part f.
b. At the end of 2008, what reasonable range of share values would you have expected for
Starbucks common stock? At that time, where was the market price for Starbucks shares
relative to this range? What would you have recommended?
c. If you computed Starbucks’ common equity share value using the dividends-valuation
approach in Integrative Case 11.1, compare the value estimate you obtained in that case with
the estimate you obtained in this case. They should be identical.

In Integrative Case 10 1 we projected financial statements

ANSWER
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