Starbucks Corporation [SBUX] does much more than make great latte. The company purchases, roasts, and markets coffee beans. Starbucks also sells such products as premium teas and coffee-related accessories through its retail stores. Imagine you are one of Starbucks’ shareholders and you would like to estimate how much the stock will earn per share over the next three years. Using the Thomson ONE database, find the earnings estimates for Starbucks Corporation for the next three years, and then answer the following questions:
a. Calculate the present value of the mixed stream of cash flows you pulled from the database. Assume you own one share of the stock. In this case, the cash flows are the earnings per share (EPS) estimates, and the interest rate is 3 percent.
b. What is the present value of the cash flows if you own 100 shares of Starbucks stock?
c. If you own 100 shares of Starbucks stock and you want to hold the stock only if you expect to earn more than $3 in earnings per share over a three-year period, would you buy more of the stock or sell the shares you already own?
d. Calculate the present value of the cash flows if the interest rate rises to 5 percent.
e. Why does the present value change when the interest rate rises?