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 income for Starbucks for Years þ1 through +5.
c. Project the continuing residual income in Year +6. Assume that the steady-state, long run growth rate will be 3% in Year þ6 and beyond. Project that the Year þ5 income statement and balance sheet amounts will grow by 3% in Year þ6; then derive the projected residual income 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 income 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 of Starbucks as of the start of Year +6 based on Starbucks' continuing residual income in Year +6 and beyond. After computing continuing value as of the start of Year +6, discount it to present value at the start of Year +1.
f. Compute the value of a share of Starbucks common stock.
(1) Compute the total sum of the present value of all future residual income (from Requirements d and e).
(2) Add the book value of equity as of the beginning of the valuation (that is, as of the end of 2012, or the start of Year +1).
(3) Adjust the total sum of the present value of residual income plus book value of common equity using the midyear discounting adjustment factor.
(4) Compute the per-share value estimate.
g. Using the residual income valuation approach, recompute the value of Starbucks shares under two alternative scenarios.
Scenario 1: Assume that Starbucks' long-run growth will be 2%, not 3% as above, and that Starbucks' required rate of return on equity is 1 percentage point higher than the rate you computed using the CAPM in Requirement a.
Scenario 2: Assume that Starbucks' long-run growth will be 4%, not 3% as above, and that Starbucks' required rate of return on equity is 1 percentage point lower than the rate you computed using the CAPM in Requirement 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 Requirement f.
h. At the end of 2012, 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?
i. If you computed Starbucks' common equity share value using the dividends valuation approach in Integrative Case 11.1 in Chapter 11, compare the value estimate you obtained in that case with the estimate you obtained in this case. Similarly, if you computed Starbucks' common equity share value using the free cash flows to common equity shareholders valuation approach in Integrative Case 12.1 in Chapter 12, compare the value estimate you obtained in that case with the estimate you obtained in this case. You should obtain the same value estimates under all three approaches. If you have not worked both of those cases, you would benefit from doing so now.