Accounting – WACC of Starbucks, Inc. (SBUX) Student’s Name Institutional Affiliation Accounting – WACC of Starbucks, Inc. (SBUX) Introduction The weighted average cost of capital (WACC) refers to the cost a company would incur to raise each new or marginal dollar of capital (Pandey, 2015). It does not refer to the average cost of dollars raised in the past. In the calculation of WACC, the main concern is with the capital that has to be availed by investors, that is, preferred stock, interest-bearing debt, and common equity. Usually, each firm has an optimal capital structure, which is defined as the mix of debt, preferred stock, and common equity that maximizes its stock price. As such, a value-maximizing company, must try to find its target or optimal capital structure and then raise new capital in such a way that the actual capital structure is kept on target over time. This paper is a report on the calculation of Starbuck, Inc.’s WACC. Starbuck’s Calculated WACC Starbucks, LLC is an USA-based international coffee firm and coffeehouse group of businesses headquartered in Seattle, Washington. According to Verma (2014), this …show more content…
This calculation will include all sources of Starbucks’s capital like preferred stock, common stock, bonds together with all other long-term debt. Usually, as a firm’s WACC rises, its rate of return on equity and beta also increases as an indication of a shrinkage in appraisal and a greater risk (Pandey, 2015). The weighted average sheds light on the amount of interest the establishment has to pay for every financed dollar. This calculation uses the following figures: (1) tax rate of 40%; (2) Cost of Debt before taxation of 3.85%; (3) Cost of Equity of 7.69%; Debt or total liabilities for 2015 of $6.626 billion; (4) Stock Price of $6.58; (5) Outstanding Shares of 1.4991 billion. Using these assumptions Starbuck’s WACC is calculated as
In SIVMED’s case, based on the definition of WACC, all capital bases should be included in its WACC. These include its common stock, preferred stock, bonds and long-term borrowings. In addition to being able to compute for the costs of capital, the WACC also determines how much interest SIVMED has to pay for all its activities. The value of the firm’s stock, which we want to maximize, depends of the after-tax cash flow. Hence, after-tax values for WACC are also needed. Furthermore, cost of capital is used to determine the cost of each debt, stock or common equity. Being able to analyze these will be essential into deciding what and how new capital should be acquired. Hence, the present marginal costs are ideally more essential than historical costs.
Based on the information in the case, Pepsi could invest US$360 million in exchange for 30% equity of Deltex. So we have to calculate the value of 30% equity of Deltex. First, we calculated the discount factor by using average unlevered beta of US independent bottlers, US 10 year Treasury bond as risk free rate and assuming market risk premium 10%. We came up with 9.83% of WACC. Next, we calculated Deltex free cash flow and terminal value and then converted them into US dollar value. Now with WACC and total cash flow, we had NPV of the company. So we deducted current debt from NPV and came up with the value of US$360M investment equal to 59.99% of Deltex equity. So the proposal to buy 30% of Deltex with US$360M is too expensive to PepsiCo and not attractive to PepsiCo.
Their poor financial performance required them to use less traditional instruments to obtain financing. The capital acquired supported their growth until they reached a level of profitability in 1978. Subsequently, they continued to increase their net income and the quality of their balance sheet. With continued prospects for growth tempered by some regulatory uncertainty, they need to determine their optimal financial structure for the future. CAPITAL REQUIREMENTS MCI's capital requirements for the next 3 years are x,y and z. See Exhibit A for more information.
11a. Answer: (Book Value WACC) Debt = 61.2 / 155.7 = 39% Preferred Stock = 15 / 155.7 = 10% Common Stock = 79.5 / 170.8 = 51% 2. Answer: (Market Value WACC) Debt = 30% Preferred Stock = 10% Common Stock = 60% C. Answer: Weighted Average Cost of Capital determines marginal cost of issuing new securities to finance projects. Such securities should be issued at market value. Therefore weights allocated to debt and equity in determining WACC should be based on market value.
The many factors affecting WACC are: general economic conditions, market conditions, the firm's operating and financial decisions, amount of financing, business risk, constant financial risk, and dividend policy. These factors have a direct impact on the variables used in calculating WACC. Such variables include the term structure of interest rate, the risk free rate, the beta, the market risk premium, the firm's marginal tax rate, and its capital structure.
Inputting all my assumptions into the WACC formula, my estimate of Nike's cost of capital is 8.4%.
Each competitor 's current ratio, quick ratio, and cash ratio are able to be found in this exhibit for the year ended in 2015. McDonald’s currently has a cash ratio of 0.76, a quick ratio of 1.20, and a 1.52. Starbucks has a cash ratio of 0.44, a quick ratio of 0.64, and a current ratio of 1.19. Finally, the Dunkin Brand Group Inc. has a cash ratio of 0.59, a quick ratio of 0.74, and a current ratio of 1.25. When looking at these ratios one is able to find that compared to its competitors, Starbucks is less liquid than McDonald 's and Dunkin Brand Group
Koehn, N.F., Besharov, M.A., & Miller, K. (2008). Starbucks Coffee Company in the 21st Century. [Case study]. Boston, MA: Harvard Business School Publishing.
Starbucks is the world’s largest specialty coffee retailer, Starbucks has more than 16,000 retail outlets in more than 35 countries. Starbucks owns more than 8,500 of its outlets, while licensees and franchisees operate more than 6,500 units worldwide, primarily in shopping centers and airports. The outlets offer coffee drinks and food items such as pastries and confections, as well as roasted beans, coffee accessories, teas and a line of compact discs. The company also owns the Seattle's Best Coffee and Torrefazione Italia coffee brands. In addition, Starbucks markets its coffee through grocery stores and licenses its brand for other food and beverage products. Starbucks Corporation was founded in 1985 and is based in Seattle, Washington. (Bramhall)
The capital structure decisions for Target Inc. are significant since the profitability of the firm is specifically influenced by this decision. Profit maximization is part of the wealth creation process and wealth maximization can be a lengthy process for financial managers. Profits affect the value of the firm and it is expressed in the value of stock. Cost of capital is how investors evaluate weighted average cost of capital (WACC). Capital structure ratios help investors gauge the level of risk that a company is taking on through financing. While Target
One of the major corporations today that is trying to control a large portion of the supply of coffee is Starbuck. Starbucks Corporation is the leading retailer, roaster and brand of specialty coffee in the world. Starbucks purchases, roasts, and sells whole bean and rich-brewed coffees, espresso beverages, cold blended beverages, an assortment of food items, coffee-related
Nike’s weighted average cost of capital. Obviously, this case aims to evaluate Joanna’s analysis. Throughout the analysis, we will estimate the cost of debt, cost of equity, and cost of capital through different financial analysis models. WACC Approach WACC is the weighted average return on capital that includes both cost of debt and equity, whereby we discount total cash flows by the appropriate discount rates By using the Capital Asset Pricing Model (CAPM), Cohen calculated a Weighted Average Cost of Capital (WACC) of 8.4%. I do not agree with Joanna’s approach for the following reasons.
Starbucks is a worldwide company, known for is delicious brews of coffee and seasonal varieties of tasty drinks for any occasion. Starbucks opened with two main goals, sharing great coffee with friends and to help make the world a little better. It originated in the historic Pike Place Market of Seattle, Washington in 1971 by Jerry Baldwin, Zev Siegl and Gordon Bowker. The creation of Starbucks’ name came from the seafaring tradition of early coffee traders and the romance evoked from Moby Dick. At the time, this individual shop specialized in the towering quality of coffee over competitors and other brewing services enabling its growth to becoming the largest coffee chain in Washington with numerous locations. In the early 1980s, the current CEO Schultz saw an opportunity for growth in the niche market. After a trip to Italy he brought back the idea of a café style environment of leisure and social meetings to the United States we now see in Starbucks locations today. Schultz ultimately left Starbucks to open his own coffee shop, Il Giornale which turned out to be a tremendous success. Fast forward a year later, Schultz got wind that Starbucks was going to sell all their components of Starbucks including their stores and factories, he immediately acquired the funds to buy Starbucks and linked both operations. Within five years he was able to open more than 125 stores starting in New England, Boston, Chicago, and gradually entered California. He wanted Starbucks to be a franchise system based on the mission of telling the truth and emphasize the quality,
a. 1. What sources of capital should be included when you estimate Harry Davis’s weighted average cost of capital (WACC)?