SESSION 5&6: VALUATION: THE DIVIDENDS VALUATION APPROACH Case Study: Dividends-Based Valuation of Starbucks’ Common Equity Exhibits 10.14 and 10.15 provide Starbucks’ income statements
Trang 1SESSION 5&6: VALUATION: THE DIVIDENDS VALUATION APPROACH Case Study: Dividends-Based Valuation of Starbucks’ Common Equity
Exhibits 10.14 and 10.15 provide Starbucks’ income statements and balance sheets for fiscal years 2010 through 2012 in dollar amounts, common-size format, and rate-of-change format Exhibit 10.16 presents Starbucks’ statements of cash flows for fiscal years 2010 through 2012 These financial statements report the financial performance and position of Starbucks and
summarize the results of Starbucks’ operating, investing, and financing activities The common-size and rate-of-change balance sheets and income statements for Starbucks highlight relations among accounts and trends over time Exhibit 10.17 provides sales analysis data and store operating data through fiscal year 2012, including same store sales growth rates, new store openings, and total numbers of stores open, including a detailed breakdown of revenues and revenue growth by segment and by store-type
REQUIRED 1
Using given information about Starbucks’s current performance, develop complete forecasts of Starbucks’ income statements, balance sheets, and statements of cash flows for Years þ1 through þ5 (Calculation – Home preparation)
Trang 7*Extra information: Assume the market equity beta for Starbucks at the end of 2012 was 0.75 Assume that the risk-free interest rate was 3.0% and the market risk premium was 6.0% Starbucks had 749.3 million shares outstanding at the end of 2012, and the share price was
$50.15
Trang 8REQUIRED 2: Using your result of projected financial statements of Starbucks for Years þ1
through þ5 estimated in REQUIRED 1, answer the following questions:
Part I—Computing Starbucks’ Value-to-Book Ratio Using the Value-to-Book Valuation Approach
a Use the CAPM to compute the required rate of return on common equity capital for Starbucks (Calculation – Home preparation)
b Using the projected financial statements above for Starbucks, derive the projected residual ROCE (return on common equity) for Starbucks for Years þ1 through þ5 (Calculation – Home preparation)
c Assume that the steady-state, long-run growth rate will be 3% in Year þ6 and beyond Project that the Year þ5 income statement and balance sheet amounts will grow by 3% in Year þ6; then derive the projected residual ROCE for Year þ6 (Calculation – Home preparation)
d Using the required rate of return on common equity from Requirement a as a discount rate, compute the sum of the present value of residual ROCE for Starbucks for Years þ1 through þ5 (Calculation – Home preparation)
e Using the required rate of return on common equity from Requirement a as a discount rate and the long-run growth rate from Requirement c, compute the continuing value of Starbucks as of the start of Year þ6 based on Starbucks’ continuing residual ROCE in Year þ6 and beyond After computing continuing value as of the start of Year þ6, discount it to present value at the start of Year þ1 (Calculation – Home preparation)
f Compute Starbucks’ value-to-book ratio as of the end of 2012 with the following three
steps:
(1) Compute the total sum of the present value of all future residual ROCE (from Requirements d and e)
(2) To the total from Requirement f (1), add 1 (representing the book value of equity as of the beginning of the valuation as of the end of 2012)
(3) Adjust the total sum from Requirement f (2) using the midyear discounting adjustment factor
g Compute Starbucks’ market-to-book ratio as of the end of 2012 Compare the value-to-book ratio to the market-to-book ratio What does the comparison suggest regarding the pricing of Starbucks’ shares in the market: underpriced, overpriced, or fairly priced? What investment decision does the comparison suggest? (Calculation – Home preparation)
h Use the value-to-book ratio to project Starbucks’ share value (Calculation – Home
preparation)
i If you computed Starbucks’ common equity share value using the dividends valuation
approach in Integrative Case 11.1 in Chapter 11, and/or the free cash flows to common equity valuation approach in Integrative Case 12.1 in Chapter 12, and/or the residual income valuation approach in Integrative Case 13.1 in Chapter 13, compare the value estimate you obtained in those cases with the estimate you obtained in this case You should obtain the same value
estimates under all four approaches If you have not yet worked those prior cases, you would benefit from doing so now (In-class discussion – Group presentation & Defense)
Trang 9Part II—Analyzing Starbucks’ Share Price Using the Value-Earnings Ratio, the Price-Earnings Ratio, Price Differentials, and Reverse Engineering
j Use your forecast data for Year þ1 to project Year þ1 earnings per share To do so, divide your projection of Starbucks’ comprehensive income available for common shareholders in Year þ1
by the number of common shares outstanding at the end of 2012 Using this Year þ1 earnings-per-share forecast and using the share value computed in Requirement h, compute Starbucks’ value-earnings ratio (In-class discussion – Group presentation & Defense)
k Using the Year þ1 earnings-per-share forecast from Requirement j and using the share price at the end of 2012, compute Starbucks’ price-earnings ratio Compare Starbucks’ value-earnings ratio with its price-earnings ratio What investment decision does the comparison suggest? What does the comparison suggest regarding the pricing of Starbucks’ shares in the market:
underpriced, overpriced, or fairly priced? Does this comparison lead to the same conclusions you reached when comparing value-to-book ratios with market-to-book ratios in Requirement g? (In-class discussion – Group presentation & Defense)