# In Integrative Case 10.1, we projected financial statements for Starbucks for Years +1 through +5. In this portion of the

## Question:

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 13 to compute Starbucks’ required rate of return on equity and share value based on the residual income valuation model. We also compare our value estimate to Starbucks’ share price at the time of the case 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
Part I—Computing Starbucks’ Share Value Using the Residual Income Valuation Approach
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 +1 through +5.
c. Project the continuing residual income in Year +6. Assume that the steady-state long-run growth rate will be 3 percent in Year +6 and beyond. Project that the Year +5 income statement and balance sheet amounts will grow by 3 percent in Year +6; then derive the projected residual income for Year +6.
d. Using the required rate of return on common equity from Part 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 Part a as a discount rate and the long-run growth rate from Part 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 Parts d and e).
(2) Add the book value of equity as of the beginning of the valuation (that is, as of the end of 2008, 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.

Financial Statements
Financial statements are the standardized formats to present the financial information related to a business or an organization for its users. Financial statements contain the historical information as well as current period’s financial...
Balance Sheet
Balance sheet is a statement of the financial position of a business that list all the assets, liabilities, and owner’s equity and shareholder’s equity at a particular point of time. A balance sheet is also called as a “statement of financial...
Discount Rate
Depending upon the context, the discount rate has two different definitions and usages. First, the discount rate refers to the interest rate charged to the commercial banks and other financial institutions for the loans they take from the Federal...

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