Starbucks Corp.
Memo
To:
You – Senior Financial Analysts
From:
Michael Casey, CFO Starbucks Corp. Inc.
Re:
Strategic Decision Analysis & Valuation
The goal of this assignment is to develop an SVA tool that allows us to study the impact of strategic
decisions on share holder value. Based on our previous analyses, your team needs to identify two
areas of improvement that could potentially increase share holder value.
One of the areas of improvement should be in the left hand side of the balance sheet – our operating
policy. Examples of this are cost reduction, better working capital management (lowering inventories,
for instance), or eliminating poorly performing assets, or reduction in capital expenditures, etc. The goal
would be to improve our cash flows from existing operations and future growth.
The second area of improvement should be based on the right hand side of the balance sheet – our
financing policy. Examples of this could be changes in debt/equity mix in our capital structure, shifting
short term borrowing (e.g. revolving line of credit of $700 million) to long term source such as LT debt or
common equity. The goal here would be to reduce our cost of capital.
As a part of this process, we first need to arrive at ‘status quo’ intrinsic value per share – i.e., share
value based on the way the firm is being run now, and before the two changes you suggest. This would
be the benchmark against which we can study the valuation impact of the two strategic changes.
Guidelines for your report:
For cost of capital estimations, use MRP of 5.5% and risk-free rate based on 10-year Treasury yield.
WACC and cost of equity calculations should reflect changes in D/E ratios in the first 5 years using
levering and unlevering formula. Assume that our debt is risk-free. The status quo levered equity beta
should be obtained from MSN website.
Assume that for years beyond 2011, for estimating terminal value, we will maintain a D/E ratio
observed in 2011 forever.
Study the impact on stock price of the two changes separately. The absolute level of status quo per
share value is likely to be different from the observed year-end market stock price. This should not be a
cause for concern. The goal is to study marginal impact of strategic changes.
In your exhibits, clearly summarize your two proposed changes, and highlight how these changes are
reflected in the balance sheet, income statement, pro forma cash flows, and the discount rate. Please
list all assumptions that underlie your income statement, balance sheet, and cash flow forecasts.
Please include pro forma spreadsheet print outs for three scenarios: status quo, proposed change 1,
and proposed change 2.
The report format should be as before. The main text should be succinct and no more than 2-3 pages.
However, feel free to use as many exhibits, graphs, tables to make an impactful presentation as you
feel necessary. I need this report by May 27.
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