2. ManagerialFinance_W6
Starbucks Corporation
The Weighted-Average Cost of Capital for Starbuck’s Corporation is 3.89%. The formula
for WACC is equal to E / (E + D) * Cost of Equity + D / (E + D) * Cost of Debt * (1 – Tax
Rate). WACC is equal to $84.51 / ($84.51 + $5,481) * 6.35% + $5,481 / ($84.51 + $5,481) *
3.85% * (1- .3145); $84.51 / $5565.51 * 6.35% + $5,481 / $5565.51 *3.85%; 0.0152 * 6.35% +
0.9848 * 3.85%; 0.00097 + 0.03791 = 0.03888 = 3.89%. The following is the required
information needed to calculate the WACC for Starbucks Corporation (Morningstar.com, 2015):
Tax Rate = 31.45%, Cost of Debt (before tax) or R debt = 3.85%, Cost of Equity or R equity =
6.35%, Debt (Total Liabilities) for September 2014 or D = $5,481(millions), Stock Price =
$57.10 (August 14, 2015), Outstanding Shares = 1.48 billion, Equity = Stock price x Outstanding
Shares or E ($57.10 * 1.48) = $84.51 billion, Debt + Equity or D+E ($5,481 + $84.51) =
$5565.51 billion.
The market value of equity or market capitalization (E) was obtained by clicking on the
ownership tab under the Starbucks Corporation section of the Morningstar website, then
scrolling down to the “peer comparison” section of the page where the equity ownership was
$84,748 in millions. The book value of debt was calculated by adding both the short-term and
long-term debts together which was $2,048 in millions. There was no short-term debt, and the
amount of $2,048 million is the long-term debt of Starbucks Corporation. This information was
obtained from using the Morningstar website, under the section of Starbucks Corporation and
clicking on the Financials tab and clicking on the Balance Sheet. The weight of equity (E) is E /
(E +D) which is $84,748 / ($84,748 + $2,048) which is equal to 0.97640. The weight of debt (D)
is D / (E +D) which is $2,048 / ($84,748 + $2,048) which is equal to 0.02360.
3. ManagerialFinance_W6
The next step in my calculating the WACC of Starbucks Corporation was to find out the
Cost of Equity. The formula for Cost of Equity is equal to the Risk Free Rate + Beta Equity
(Average Market Return – Risk Free Rate). The Risk Free Rate that was obtained from the U.S.
Department of the Treasury website under the 10-year treasury securities and the rate of August
14, 2015 is 2.20%. The Average Market Return that was used in calculating the WACC is 7%
(www.bloomberg.com, 2015). The Beta Equity for Starbucks Corporation is 0.83
(www.finance.yahoo.com, 2015). The Cost of Equity for Starbucks Corporation is 2.20% + 0.83
(7% - 2.20%), which is equal to 2.20% + 0.83(5%), which is 0.0635 or 6.35%. The Cost of Debt
for Starbucks Corporation is 3.85% (www.morningstar.com, 2015) which can be found under the
bonds tab under the Starbucks Corporation section.
I am extremely confident in the answer I obtained through researching and analyzing the
data of Starbucks Corporation. The Weighted Average Cost of Capital for Starbucks Corporation
is 3.89% for 2015. The company has to pay 3.89% of interest for every dollar that is financed.
This is considered the cost of capital. This is the rate in which Starbucks Corporation will be
expected to pay on average to the investors for helping to finance the assets of the corporation.
The risk that the investors would be taking in investing in this corporation is considered a low
percentage which is of low risk. Starbucks Corporation has a return on invested capital of
32.35% which shows that the corporation is generating a higher return on invested capital than
the costs of raising the capital needed for the investments. This simply means that Starbucks
Corporation is earning excessive returns. As growth of the Starbucks Corporation increases, and
the excess returns remain positive this will be good when new investment opportunities in the
future are decided upon.
4. ManagerialFinance_W6
References
Bloomberg.com. (2015, May 3). Stock Investors Should Expect 6%-7% Annual Return, Buffett
Says - Bloomberg. Retrieved from
http://www.bloomberg.com/apps/news?pid=newsarchive&sid=a1.neDMy8DEU
Morningstar.com. (2015, July 31). Shareholder Overview for SBUX Starbucks Corp including
Fund Owner Activity, Style, Equity & Debt Ownership, and Enterprise Value. Retrieved
from http://investors.morningstar.com/ownership/shareholders-
overview.html?t=SBUX®ion=usa&culture=en-US
U.S. DEPARTMENT OF THE TREASURY. (2015, August 14). Daily Treasury Yield Curve
Rates. Retrieved from http://www.treasury.gov/resource-center/data-chart-
center/interest-rates/Pages/TextView.aspx?data=yield
Yahoo Finance. (2015, August 14). SBUX Key Statistics | Starbucks Corporation Stock -
Yahoo! Finance. Retrieved from
https://finance.yahoo.com/q/ks?s=SBUX+Key+Statistics