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Cost of Capital and Valuation for Starbucks

Cost of Capital and Valuation for Starbucks. Mitchell Schmitt. Agenda. Beta and Market Premium Considerations Calculation of Cost of Equity Calculation of Cost of Debt Weighted Averages of Debt and Equity (Net Financial Asset Consideration) WACC Impact of DCF Analysis. Other Sources Beta.

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Cost of Capital and Valuation for Starbucks

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  1. Cost of Capital and Valuation for Starbucks Mitchell Schmitt

  2. Agenda • Beta and Market Premium Considerations • Calculation of Cost of Equity • Calculation of Cost of Debt • Weighted Averages of Debt and Equity (Net Financial Asset Consideration) • WACC • Impact of DCF Analysis

  3. Other Sources Beta • Wide Range of betas that fall within estimation by Regression Analysis • Markedly different than Bloomberg’s findings

  4. Bloomberg • Beta= .881 • Decided to use weighted average of Bloomberg (75%) and other sources (25%) because of wide ranging estimates .75(.881)+.25 (1.18)=.96 WB(Beta Bloomberg)+ WA(Beta Average)

  5. Cost of Equity Beta For Use0.96 Cost of Equity= Risk-Free+ Beta(Market Premium) 3.69%+.96(6%) =9.42% **Bloomberg estimates cost of Equity to be 9.3%

  6. Cost of Debt

  7. Justifying 2.3% as cost of debt • 2013 was an abnormality for long-term liabilities • Previous 3 years ranged from 2.2-2.3% • Bloomberg shows a debt cost of 2.4%

  8. Weight of Equity Market Value of Net Op. Assets 54336.946 Weight of Equity 104%

  9. Weight of Debt • Starbucks carries net financial assets due to large amounts of excess cash • Debt represents -4% of Market Value for Net Operations

  10. WACC Calculation 9.42%(1.04029)+ 2.3% (-.04029)= 9.71% Bloomberg calculates a WACC of 9.1% which I chose to use going forward

  11. Using Previous WACC of 10%

  12. DCF Using 9.1%

  13. Questions?

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