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Starbuck's Inc, Valuation Models

Weighted Cost of Capital (WACC)

The Weighted Average Cost for Capital is calculated using the

following formula:

WACC = wdkd(1-T) + was


The variables for this formula are calculated as followas


wd = Book Value of Debt / [Market Value of Equity + Book Value of Debt]

The book value of debt is calculated by adding up the total of all the

debt on the balance sheet. The market value of equity is the "Market

Cap," and equals the number of (common) shares outstanding multiplied by

the price/share. The variable ks represents the cost of common equity.

The CAPM can be used for this variable. The weights (wd and was

- note

that: wd + was

= 1; so you only have to calculate one of them). We need

to calculate the weight of debt and the weight of equity. In other

words, what portion of the company's financing is by debt? The cost of debt

(k d); is the rate that Starbuck's will pay based on their credit

rating and the yield of a stable market indicator such as the 30 year

T-bond. The 30-year T-bond is currently at 5.08%. Starbuck's credit rating is

AA, which makes their k d 5.28%. The corporate tax rate ( T ) for

Starbuck's is 37.3%. These number were obtained from the Starbuck's Website

and are contained the 2001 Annual Report. To calculate WACC we simply

plug in the numbers:

wd = $38,650,000,000 / [$9,291,996,469+$38,650,000,000]

wd = 0.806

WACC = (0.801)(.05528)(1-.373)+(1-0.806)

WACC = (.044)( .627 )+(.194)

WACC = 0.22 = 22%

Capital Asset Pricing Model

Risk Free Rate on 30 Year Treasury Bonds as of December 2001 (RF) 5.08


Beta (B) 0.94

Market Risk (S & P since 1947) (RM) 8.2%

CAPM=Risk Free Rate + B(RM_RF)

CAPM for Starbuck's = .0508 + .94(.082-.0508)

CAPM for Starbuck's = 8.01%

Choosing Appropriate Discount Rates

The CAPM method in this case gives a more accurate picture of the

discount rate that should apply to Starbuck's. The reason being that the

formula for WACC takes into account the current share price in the form

of Market Capitalization. This number reflects the price that Starbuck's

must pay its shareholders for their investment. This stock price has

more than doubled over the past year and this is reflected in the WACC



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