Starbucks Corp.
Memo
To:
You – Senior Financial Analysts
From:
Michael Casey, CFO Starbucks Corp. Inc.
Re:
Strategic Decision Analysis & Valuation
As the next step in our SVA analysis, I would like you to do the following:
Assess our company’s relative valuation and past 5 years of stock price performance. Please use at
least 2 or 3 commonly used multiples. How does our valuation compare to our peers and market?
What is our implied growth in the current valuation? In which dimension(s) (e.g. profit margin, ROE,
growth, risk, etc.) is the market assessing our strength/weaknesses? Are the consensus analyst
estimates/projections consistent with current market valuations?
Please use MSN and Yahoo Finance websites for your data sources. Yahoo Finance is convenient for
obtaining a list of our main competitors. Please ensure data consistency and list the sources of data
used. If necessary, use 10 year Treasury bond yield and market risk premium of 5.5%.
Based on the pro-forma statements from your previous assignment, estimate cash flows for the Direct
Model (free cash flows to equity - FCFE) and Indirect Model (Free cash flows to the firm - FCFF).
Please verify the consistency of the two measures of cash flows by also calculating cash flows to debt
holders, and cash flows to share holders. Use the example spreadsheet placed on our website as a
guide.
Using the same tools we used to assess past performance (ratios, etc.), please comment on and
highlight any striking aspects of future performance implied in our projections. Do our assumptions
used to generate pro forma statements imply unusual future performance? If this is the case, we may
need to revise the assumptions used to generate pro forma statements. Please suggest any changes
you feel necessary.
As before, provide me with detailed spreadsheets documenting your analysis and assumptions plus a
short write-up (maximum of 2 typed pages, double spaced, font size 12, with one inch margins all
around and optionally additional pages of summary tables/graphs). A well organized, concise report is
extremely important. Tables and graphs are a great way to summarize key information but it is
important to refer to them and highlight the information conveyed by them in the main text of your
report. Do not leave it to the reader to figure out what information you are trying to convey by such
attachments.
I need this report on May 8.
1
Our current CEO James Donald, wants to examine the impact of several strategic decisions and their
impact on share holder value (SVA). To move our company towards this goal, as a first step, we need
to create pro forma income statement and balance sheet for the next five years (2007 – 2011). Please
use the historical statements provided to you in SBUX.XLS for this purpose on our website.
In addition, I would like you to examine our past and current performance using Traditional
Performance Analysis. Using key ratios measuring profit margins, financial condition, investment
returns, and management efficiency, analyze our past performance as well as current performance
compared to our industry and overall market (S&P 500).
As I am assigning this task to several teams, to ensure consistency, limit your source of data only to
MSN Money website (moneycentral.msn.com).
Assumptions to be used in forecasting:
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Sales growth in forecast years will be 20% per year
Assumptions regarding forecasts of each income statement and balance sheet line items should
be based, as far as possible, on averages of past 3 years. For example, cost of revenue as a %
of sales should be based on the average of past 3 years figures.
In any given year, external financing needed (i.e., if EFN is positive) will be met through issuance
of long term debt only.
In any given year, if there is excess cash (i.e., if EFN is negative), this amount will be held as
cash earning 0% interest.
Helpful Hints for Write-Up:
1.
Provide an introduction describing the purpose or goal of your analysis.
2.
In the body of your report provide some details (numeric support, causes, and implications)
regarding each significant aspects of our current and past performance. Identify the key issues.
3.
In the concluding paragraph summarize the main findings of your analysis and provide any
recommendations you may have for possible improvements in our future performance.
Please provide me with detailed spreadsheets documenting your analysis and assumptions plus a short
write-up (maximum of 2 typed pages, double spaced, font size 12, with one inch margins all around and
optionally an additional page or two of summary tables/graphs). A well organized report is important.
I need this report by February 5.
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