Select a major industrial or commercial company based in the United States and listed on one of the major stock exchanges in the United States. Each student should select a different company. Avoid selecting an insurance company or a bank, because the financial ratios for these financial businesses are different. Write a seven-to-eight-page double-spaced paper answering and demonstrating with calculations and financial data the following questions.
1. What is the name of the company? What is the industry sector?
Starbucks Corporation is in the Food and Beverage industry
2. What are the operating risks of the company?
Economic conditions in the US and certain international markets could adversely affect Starbucks’ business and financial results. – as a retailer Starbucks is dependent upon the customer’s discretionary spending. Customers may have less money for discretionary purchases as a result of job losses, foreclosures, bankruptcies, increased fuel and energy costs, higher interest rates and taxes. Decreases in customer traffic will negatively impact financial performance. Starbucks may not be successful in implementing important strategic initiatives or effectively managing growth, which may have an adverse impact on our business and financial results. – there is no assurance that Starbucks will be able to implement strategic initiatives and achieve the results that are within management’s expectations.
These initiatives are designed to create growth, improve operations and drive long-term shareholder value. Starbucks face intense competition in each of our channels and markets, which could lead to reduced profitability. Starbucks is highly dependent on the financial performance of the America’s operating segment – the Americas operating segment contributes 74% of the total net revenues in fiscal 2013. Starbucks is relying on the success in the European/ Middle East, China/Asia Pacific operating segments to achieve overall growth targets. Other international operations are also subject to additional inherent risk when conducting business abroad. Of which, include:
Forex rate fluctuations.
Changes or uncertainties in economic, legal, regulatory, social and political conditions in international markets. Restrictive actions of foreign or US governments affecting trade.
Enforceability of intellectual and contract rights.
Disruption in energy supplies.
Delays in store opening beyond the control of management.
Increases in the cost of high-quality Arabica coffee beans or other commodities. Disruption in the supply chain, which will impact the ability to deliver Starbucks’ products. The loss if key personnel or difficulties in recruiting and retaining qualified personnel Adverse public or medical opinions about the health effects of consuming Starbucks’s products, as well as reports of incidents involving food-borne illnesses, food tampering or food contamination. Starbucks relies heavily on information technology in operations, and any material failure, inadequacy, interruption or security failure of that technology could harm Starbucks’ ability to effectively operate the business. Failure to comply with local laws and regulations.
3. What is the financial risk of the company (the debt to total capitalization ratio)?
Market Cap: 56.69 BN
Debt/total cap ratio = 0.036
4. Does the company have any preferred stock? The company does not have preferred stock. 5. What is the capital structure of the company: short-term portion of long-term debt, long-term debt, preferred stock (if any), and market value of common stock issued and outstanding? short-term portion of long-term debt
Market value of common stock
6. What is the company’s current actual beta? 0.95
7. What would the beta of this company be if it had no long-term debt in its capital structure? Unlevered Beta using Hamada equation = Beta /[1+(1-T) x (D/E)] Beta : 0.95
Marginal Tax Rate, T: 32.8%
Unlevered Beta = 0.96 / [1+(1 -0.328)*0.036] =0.937
8. What is the company’s current marginal tax rate?
Income taxes for the fiscal year ended 2012 resulted in an effective tax rate of 32.8% compared to 31.1% for fiscal year 2011. (Starbucks Coffee Company, 2013)
9. What is the price earnings multiple of the company?
Price to earnings ration. This ratio is used in conjunction with other metrics to give analyst and investors are quick initial impression of whether a company would make a good investment. (investopedia, 2014) Starbucks P/E ratio is 385.05
10. How has the company’s stock been performing in the last 5 years? Starbucks share price 282.32% in the last 5 yrs.
11. Would you invest in this company? Why or why not?
I would invest in Starbucks. SBUX has the highest P/E ratio among its competitors. Their cost of debt is low compared to their cost of equity. That is why they are relying on debt for their expansion. Their dividends per share have been increasing yearly. 18. The last page of your paper should be a Bibliography of the sources you used to prepare this paper.
investopedia. (2011, feb). Cost of Equity. (investopedia) Retrieved septmeber 2014, from Investopedia: www.investopedia.com/terms/c/costofeqquity.asp investopedia. (2014). Definition of “Prince Multiple’. Retrieved from www.investopedia.com: www.investopedia.com/terms/p/princemultiles.asp Starbucks Coffee Company. (2013). Fiscal 2013 Annual Report. Investor Relations. Seattle: Starbucks Coffee Company. yahoo.com. (2014, september). Yahoo Finance. (Yahoo.com, Producer) Retrieved september 2014, from Yahoo finance: finance.yahoo.com/q/ks?s=SBUX+Key+Statistics