Starbucks recently posted a Return on Equity (ROE) of 13% due to their global
expansion and the reopening of economies post-COVID. The firm retains and reinvests half its earnings, issuing dividends on the other 50% of their net income. Starbucks has 1.15 billion shares outstanding and their dividend next year is expected to be $1.95 per share.

What is your estimate of Starbucks' dividend growth rate?

 

If shareholders require a 12% rate of return for a stock with this amount of risk and they expect this growth rate (from part a.) to be perpetually sustainable, what would be the price of one share of Starbucks? 

You believe that this growth rate is only sustainable for three years, after which CML's dividends will grow at a more modest 4.5% annual rate forever (the dividend in year 4 will be higher than year 3 by the percentage calculated in part a. whereas the dividend in year 5 will be 4,5% higher than the dividend in year 4).

What price would you be willing to pay now for one share of Starbucks? Explain completely.

Answer rating: 100% (QA)

To estimate Starbucks dividend growth rate we can use the formula for the sustainable growth rate Di... View the full answer