You wish to determine the value of Starbucks' common stock (ticker symbol SBUX) using the dividend discount model approach. You collect the following data:

SBUX's current annual dividend $1.44/share

SBUX's beta to the broad market .65

Market risk premium for US stocks 7.7%

Risk free rate 1.8%

You further determine SBUX's dividend growth rate for the past five years has been 11.4% per annum and you expect that growth rate to continue for the coming year. However, you expect that growth rate to fall to 8% p.a. in years 2 and 3 before settling at 5% p.a. thereafter.

(i) What is your estimated per share value of SBUX?

(ii) Assuming SBUX was currently trading at $75/share, and leaving your growth rate assumptions for years 1 through 3 unchanged, what approximate terminal growth rate assumption would be required to have your DDM model produce this price?

Answer rating: 100% (QA)

Starbucks Stock Valuation DDM Model i Estimated Value per Share Step 1 Calculate the cost of equity ... View the full answer