Bryon Gaskin
FIN 500
Dr. Benkato
Mondays 8:00pm
Back Ground:
Starbucks Corporation is the sector called Specialty eateries. It largest competitors are, PANERA BREAD, DIEDRICH COFFEE, and FLANIGAN'S ENTERPRSE INC. With Starbucks having more than 10 times the sales of its nearest competitor.
An overview perspective shows that Starbucks is just slightly below the industry average in most categories. This is a negative aspect in some ratios such as current ratio but could be considered a positive in other ratios such as the Debt ratio.
Analysis:
The purpose of this report is to compare the market value of the securities for the Starbucks Corporation and compare this with the calculated financial figures from the financial statements, taking into consideration, the different types of debt the company owes, the preferred stock and common stock rights to the company.
Evaluate your company debt, preferred stock and common stock as follows:
a. Find the value (how much it is worth) of each issue separately (debt, if it has more than one kind of debt make sure to do each separately, etc)..
b. Obtain the market value of these securities (that is how much they sell for) use sources such as the Wall Street Journal.
LONG TERM DEBT:
Given:
Starbucks does not issues bonds; however for purposes of illustration we will assume that off it’s long term debt is issued as a bond that matures in 2011
Yield to Maturity Y= Annual interest payment+ (Principal payment – Price of Bond)
Number of years to maturity .(06*Price of the bond)+(.4*Principal Payment)
Price of Bond= $5,100,000
Principal Payment= $5,425,530
Annual Interest payments $331500
Number of Years to maturity 8
Formula: = =(D4+(D3-D2)/D5)/((0.6*D2)+(0.4*D3))
B / C / D1 / Price of bond / $ 5,100,000.00
2 / Principal Payment / $ 5,425,530.00
3 / Annual interest payment / $ 331,500.00
4 / Years to maturity / 8
5
6
7
8 / Y = / 7.12%
PREFERRED STOCK
Given:
Kp=Dp/(Pp-F) or excel formula : =c1/(c2-c3)
Company has no preferred stock; however purposes of this exercise say the company has the following amounts for preferred stock, annual dividends on preferred stock and selling costs.
A / B / C1 / Annual dividend on preferred Stock / $ 2,336,827.50
2 / Price of preferred stock / $ 30,055,500.00
3 / Selling cost / $ 100,000.00
4
5 / Cost of Preferred stock / 7.80%
6
COMMON STOCK
Given:
Net Income $215.1
Number of common shares 338.2 million
Earnings per Share $.55
PE ratio for industry 47.2
Value of Common Stock = EPS of $.55 times Industry PE ratio of 47.2 equals a share price of $25.96
COMPARISON TO MARKET PRICES
Giving the information obtained above Starbucks uses equity as it’s primary source of financing.
Liabilities / % of Total FinancingLong Term Debt / 5,100,000 / 0.289%
Equity
Preferred Stock / 30,055,500 / 1.706%
Common Stock / 1,726,600,000 / 98.005%
Total Liabilities and Equity / 1,761,755,500 / 100.000%
Since Starbucks does not issue bonds, illustrated below are two possible bond prices.
The original bond price is $5,100,000 and par value of the bond is $5,425,530, then the bond is selling at a discount. If the new bond price were selling at $5,600,000 then the bond would be selling at a premium. The important part is the to determine whether the bond is under valued or over valued
For instance if the bond was selling at $5,100,000 and the par value was $5,425,530 and the stated yield was 8.11%, then the bond is over valued because the bond price with yield of 8.11% should be $4,800,000. If the bond price was $5,100,000 and the par value was $5,425,530 and the stated yield was 5.74%, then the bond is under valued because the bond price with a yield of 5.74% should be $5,550,000
Preferred Stock
Again because the company offers no preferred stock some examples will be used:
Given from above:
Annual dividend on preferred Stock / $ 2,336,827.50Price of preferred stock / $ 30,055,500.00
Selling cost / $ 100,000.00
Cost of Preferred stock / 7.80%
If the annual dividend on preferred stock were to raise to $2.5 million, the cost of preferred stock would rise to 8.35%. If the annual dividend of preferred stock were to drop to $2 million, then we would expect the Cost of Preferred stock to drop to 6.68%. If the Price of preferred stock were to drop to $28,000,000 we would expect the cost of preferred stock to rise to 8.38%. If the price of preferred stock were to rise to $35,000,000 then we would expect to see the cost of preferred stock fall to 6.70%
Common Stock Comparison:
The common Stock comparison was very close to what the actual market price has been with in the last month. Starbucks does not pay dividends so the method used was EPS times the PE ration of the industry which resulted in a stock price of $25.96 and the actual price the market has been $25 to $26 for about the last 3 months.
This exercise has been very beneficial to me because I am personally, heavily invested in Starbucks, and did not realize the extent to which it relies on Equity as a part of its financing. And the major conclusion that I have reached is that even though Starbucks as strong growth rate its profit potential is hampered by its high use of equity and low use of debt. With this type of finance structure the company has reduced its risk by not using debt but at the same time reduced it potential profits. Although this my change in the future because the company in recent news is making serious effort to buy back a large portion of its common stock.