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...

a Following the CAPM Starbucks faces a required rate of return on equity capital of 748 percent at the end of 2008 This rate is computed as follows ER ...

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

Question:

In Integrative Case 10.1, we projected for Starbucks for Years +1 through +5. In this portion of the Starbucks Integrative Case, we use the projected 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
Computing Starbucks’ Share Value Using Free Cash Flows to Common Equity Shareholders
a. Use the CAPM to compute the required rate of return on common equity capital for Starbucks.
b. Using your projected from Integrative Case 10.1 for Starbucks, begin with projected net cash flows from operations and derive the projected free cash flows for common equity shareholders for Starbucks for Years +1 through +5.
You must determine whether your projected changes in cash are necessary for operating liquidity purposes.
c. Project the continuing for common equity shareholders 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 amounts will grow by 3 percent in Year +6; then derive the projected statement of cash flows for Year +6. Derive the projected for common equity shareholders in Year +6 from the projected statement of cash flows for Year +6.
d. Using the required rate of return on common equity from Part a as a compute the sum of the present value of free cash flows for common equity shareholders for Starbucks for Years +1 through +5.
e. Using the required rate of return on common equity from Part a as a 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 free cash flows for common equity shareholders 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 free cash flows for equity shareholders (from Parts d and e).
(2) Adjust the total sum of the present value using the midyear discounting adjustment factor.
(3) Compute the per-share value estimate.

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