Forecasts for net cash flows from operations: Year 1- 2603, Year 2- 2559, Year 3- 3181, Year 4- 3381, Year 5- 3901, Year 6- 3248

Forecasts for net cash flows from investing activities: Year 1- (1373), Year 2- (1527), Year 3- (1697), Year 4- (1873), Year 5- (2071), Year 6- (530)

Forecasts for net cash flows fro financing activiities: Year 1- (1189), Year 2- (884), Year 3- (1324), YEar 4- (1340, YEar 5- (1645), YEar 6- (2662)

In Case 10.1, we projected nancial statements for Starbucks for Years 1 through 5. In this portion of the Starbucks Integrative Case, we use the projected nancial statements from Case 10.1 and apply the techniques learned in this chapter to compute Starbucks required rate of return on equity and share value based on the free cash ows valuation models. We also compare our value estimate to Starbucks share price at the time of the case development to provide an investment recommendation. The market equity beta for Starbucks at the end of 2012 is 0.75. Assume that the risk-free interest rate is 3.0% and the market risk premium is 6.0%. Starbucks has 749.3 million shares outstanding at the end of 2012. At the start of Year 1, Starbucks share price was $50.15

CAPM= .03+.75x(.06)= 7.5%

d. Using the required rate of return on common equity from Requirement a as a discount rate, compute the sum of the present value of free cash ows for common equity share holders for Starbucks for Years 1 through 5. = 5 points

e. Using the required rate of return on common equity from Requirement a (completed Chapter 11 a) as a discount rate and the long-run growth rate from Requirement c, compute the continuing value of Starbucks as of the start of Year 6 based on Starbucks continuing free cash ows for common equity shareholders in Year 6 and beyond. After computing continuing value as of the start of Year 6, discount it to present value at the start of Year 1. = 5 points

Long-run growth rate FROM PART C is 3%.

a. Use the CAPM to compute the required rate of return on equity capital for Starbucks. = 5 points

CAPM = E(Rf)+Bj X (E(RM)) - E(Rf))

E= expectation

REJ= required return on common equity

Rf= risk free rate of return= 3%

Bj= market beta= .75

RM= required return on diversified, market-wide, portfolio of stocks

CAPM= .03+.75x(.06)= 7.5%