3. ASSIGNMENT 2: CASE STUDY - STARBUCK COFFEE CO. (15% MARKS) REPORT DUE :THU 9TH DECEMBER 2021 Topics: Operating Profits, Free Cash Flows, and Firm Value: An Application Tasks: Calculating the Free Cash Flows, Determining the value per share for Starbuck and Analysing the Corporate Expansion Strategy Source: Hoovers' Stock Chart 4000 35.00 mm 000 20.00 15.00 1000 Janos Jan Jan Jan Figure 1: Starbuck stock prices from 2005 to 2009 After decades of grand growth in the price of Starbucks stocks, Starbucks Coffee Company experienced continuous drop of stock prices from the beginning of 2007 to the end of 2007. During 2007 Starbucks Coffee Company's stock price continuously dropped resulting in a drop of approximately 40%, from $35.42 on December 29, 2006 to $20.47 on December 31, 2007. This was vastly different from a decade of over 15% annual growth of average monthly stock prices. Starbucks has really grown since their first Seattle store in 1971. In the last three years, from 2005 to 2007, they have opened 5515 new stores. In October 2006, Starbucks was the largest global roaster and retailer of coffee with more than 12,000 retail stores in 60 countries, some 3,000 of which are to be found in forty countries outside the United States. Upon first glance of their financial statements, there was about a 20% increase in both revenues and net income in 2007. Such growth could be counter intuitive to the over 40% drop of market, especially when profit indicators, such as net income, return on equity and cash flow per share, have been increasing for the past 4 years, ie from 2003-2007. The 40% drop of market price of Starbucks' shares from 2006 to 2007 appears to be counter intuitive when viewed in terms of actual revenues and net incomes. What triggered the drop of stock price in fiscal year of 2007? Did Starbucks' 2006 expansion plan go wrong? What went wrong with their business strategy that resulted in deep plunge in their share prices? TASK: Recently graduated with MBA from Uniten, you have been shortlisted for an interview as a Corporate Strategy Manager position at Starbuck Coffee Malaysia Kuala Lumpur. During the upcoming interview, you are required to do a 20-minutes presentation on the case study to the CEO of Starbuck Malaysia. You are required to submit not more than 25 pages of powerpoint slides before the interview. Relevant Discussions and Analysis in the slides: 1. Calculate Starbucks' free cash flow per share in 2005-2007? Show the trend of Free Cash Flow compared to Sales and Net Income. Why was there a drop of free cash flow in 2006 when the cash position actually increased 50%? 3. What is the the financial impact of an expansion strategy? How do we know whether the 2006-2007 expansion was value-enhancing to the company? 4. How did Starbucks perform in terms of liquidity, leverage, efficiency and profitability before and after the expansion? Who were Starbucks' competitors? How did Starbucks compare to the competitors and industry average? 5. How did changes in the demand for coffee beans and cruel oil prices affect the value of the expansion? What were other considerations that should have been taken into consideration prior to changes of the expansion strategy? 6. What went wrong with their business strategy that resulted in deep plunge in their share prices in 2007? Recommend what should be next best strategies for Starbuck to improve their share prices higher back to normal