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  • Starbucks Valuation Report

    Leavey School of Business

    of

    SANTA CLARA UNIVERSITY

    Submitted on: June 6th, 2016

    Spring 2016

    Prepared by: Azmeena Zaveri

    Divya Pari

    Poonam Jadhav

    Sakshi Gambhir

    Tommy Baldacci

  • Table of Contents 1. Economic Environment ........................................................................................................................... 1 1.1 Global ...................................................................................................................................................................... 1 1.2 US ............................................................................................................................................................................. 1 1.3 EMEA ....................................................................................................................................................................... 1 1.4 CAP ........................................................................................................................................................................... 1

    2. Industry Analysis: ..................................................................................................................................... 1 2.1 Fast Food Industry Outlook ............................................................................................................................. 1 2.2 Major Competitors ............................................................................................................................................. 1

    3. Company Description .............................................................................................................................. 2

    4. Cost of Debt (Kd) ....................................................................................................................................... 2 4.1 Risk Free Rate ...................................................................................................................................................... 2 4.2 Default Premium ................................................................................................................................................. 2 4.3 Interest Coverage Ratio .................................................................................................................................... 3 4.4 Altman Z Score ..................................................................................................................................................... 3 4.5 Starbuck Debt Rating- ....................................................................................................................................... 4 4.6 Starbucks Pretax & Post Tax Cost of Debt across maturities ............................................................... 4

    5. Value of Debt- ............................................................................................................................................. 4 5.1 Starbucks Value of Long Term Debt ............................................................................................................. 4 5.2 Starbucks Value of Lease- ............................................................................................................................... 5 5.3 Weighted Average Cost of Debt ...................................................................................................................... 5

    5.4 Total Value of Debt and Lease Obligations .................................................................................... 6

    6. Cost of Equity .............................................................................................................................................. 6 6.1 Beta (): ................................................................................................................................................................. 6 6.2 Risk free rate (Rf ): ............................................................................................................................................. 7 6.3 Market Risk Premium (Rm - Rf ): ..................................................................................................................... 7

    7. Weighted average cost of capital (WACC) ......................................................................................... 8 8 Estimating Starbucks Enterprise and Equity Value ....................................................................... 9 8.1 Valuation ............................................................................................................................................................... 9 8.2 Valuation Techniques ....................................................................................................................................... 9

    i. Discounted Cash Flow (DCF) .............................................................................................................................................. 9 ii. Relative Valuation .................................................................................................................................................................. 9

    8.3 Starbucks Enterprise Value Calculation using Discounted Cash Flow Model ................................ 9 a.i. Estimating Starbucks Current (Base year) Free Cash Flow (FCF) .............................................................................. 10

    Net Operating Profit After Taxes (NOPAT) ............................................................................................................................ 10 Net Capital Expenditure (Net Capex) ....................................................................................................................................... 10 Changes in Net Working Capital ................................................................................................................................................. 11 Starbucks Current (Base Year) Free Cash Flow ................................................................................................................... 11

    a.ii. Estimating Starbucks Future Free Cash flows .................................................................................................................... 11 i. Determining an appropriate forecasting period ............................................................................................................. 12 ii. Normalizing NOPAT, Net Capex, and Change in Working Capital to Revenue Ratios ................................... 12 iii. Forecasting Revenue ................................................................................................................................................................ 12

    b. Estimating Starbucks Terminal Value using Perpetuity Growth Method .................................................................. 13 i. Estimating Expected future Cashflow as at 2020 ............................................................................................................ 13 ii. Determining Long Term Growth Rate ................................................................................................................................ 14 iii. Determining the Discount Rate to be used ...................................................................................................................... 14

    2. Determining Discount Rate ............................................................................................................................................ 14 3. Calculating Present Value of Future Free Cash Flows ........................................................................................ 14 4. Estimating Starbucks Equity Value ............................................................................................................................. 14

    9. Relative Valuation: ................................................................................................................................. 15

  • 9.1 Creation of master list of comparables .................................................................................................... 15 9.2 Identification of value drivers ..................................................................................................................... 15 9.3 Creation of the elimination and acceptance matrix ............................................................................. 16 9.4 Estimation of Valuation ratios for valuation matrix ............................................................................ 16

    9.4.1 Enterprise Value/EBITDA .................................................................................................................................. 16 9.4.2 Enterprise Value/Revenue ................................................................................................................................ 16

    9.5 Adjusting for differences ............................................................................................................................... 17 9.6 Estimation of the enterprise value and equity value of Starbucks ................................................. 17

    References ...................................................................................................................................................... 18 Appendix Exhibits ..................................................................................................................................... 19

    12.1 Exhibit- 5A- Interest Coverage Ratio ...............................................................................