E14.10. Reverse Engineering for Starbucks Corporation (Medium) In January 2008, the 738.3 million outstanding shares of Starbucks Corporation traded at $20 each. Analysts' consensus carning-per-share estimates of $1.03 for the fiscal year end- ing September 30, 2008, gave the firm a forward P/E of 19.4. The firm reported earnings per share for 2007 of $0.90, up from $0.74 a year earlier.

The following information was garnered from the firm's financial statements (in mullions): 2007 2006 Revenues $9,412 $7,787 Core operating income (after tax) 671 Net operating assets 3,093 2,565 Net financial obligations 915 337 Common equity 2,178 2,228

a. From these statements, calculate the following for 2007 (with beginning-of-period balance sheet numbers in denominators where applicable): (1) Core operating profit margin (2) Core return on net operating assets (core RNOA) (3) Asset turnover (4) Growth rate for net operating assets.

b. Using these numbers and a required return of 9 percent, forecast residual operating in- come (ReO) for fiscal year 2008.

e. What is the stock market's implied rate of growth for residual operating income after 2008?

d. Suppose that you forecast that Starbucks will grow residual operating income at a 3.5 percent rate after 2008. What is your expected return from buying the Starbucks's business at the current market price? Real World Connection Exercises on Starbucks are E8.8, E9.9, E11.9 and E12.8.