1.

Calculate recurring earnings before tax for each of the fiscal years ended October 2, 2016
and September 27, 2015. State clearly your assumption(s) about which component(s) of
earnings you consider to be nonrecurring. Your calculation should include the non‐controlling
interest.

As seen in the table below, the recurring earnings before tax for the fiscal year ended 2016
remained the same at $4198,6. On the other hand, recurring earnings for the fiscal year ended
September 2015 decreased to $3573.5.
Recurring earnings is the portion of a company's revenue that is expected to continue in the
foreseeable future and are predictable, stable and counted on to occur regularly with high
degree of certainty. In the case of Starbucks, the litigation credit, gain resulting from
acquisition and loss on extinguishment of debt are one-off items that are not expected to occur
regularly and have therefore been excluded from our calculations of recurring earnings.
Moreover, as can be seen in the table below earnings from equity investees appear to be stable
and are regular therefore they can be counted as recurring earnings in this case. Please note
that while equity investments might not be in the core business of Starbucks due to relatively
regular nature of these earnings we are assuming Starbucks will hold these investments and
earnings will be generated from them regularly.

2. Using the same assumption(s) as in Question 1 about which component(s) of earnings you
consider to be non‐recurring, and always including the non‐controlling interest in the
computation, calculate recurring earnings after tax for each of the fiscal 2016 and 2015. Use
effective tax rates.

3. Use ending balances for balance sheet numbers and recurring earnings after tax from
Question 2 to compute the Dupont decomposition of ROE for each of the fiscal years 2016
and 2015. Which of the three components of ROE indicate(s) that the company’s performance
improved?
[ROE = net profit margin * asset turnover * financial leverage, where net profit margin = net
income/sales, asset turnover = sales/assets, and financial leverage = assets/equity]