I need policy recommendations on corporate financial

management of STARBUCKS Co. the policy recommendations should include all of the following:

? (1.A) Corporate financing strategies and capital structure decisions (with applications

of Capital Structure Theories);

? (1.B) Dividend policy (with applications of Dividend Theories);

? (1.C) Corporate governance of this firm (with applications of Corporate Finance

Theories); and

? (1.D) Other corporate financial policies that may create value for this firm.

Address the following questions in your discussions: If you were the management of starbucks, how would you manage corporate financing strategy, capital structure decision,

dividend policy, and corporate governance of starbucks company (i.e., based on your applications of the

M-M theorem and different types of capital market imperfections)? What policies would you recommend to enhance corporate governance and firm value for STARBUCKS ? Support your recommendations with your analyses and results in Steps (1) to (3) above, as well as applications of corporate finance theories (e.g., the M-M Theorem, Capital Structure Theories, Dividend Theories, Corporate Governance, etc.).

? (1.E) As a financial analyst, what would be your own stock recommendation (e.g., buy/hold/sell/others) of STARBUCKS company based on your findings in Steps (1) to (4) above?

I attached the previoussteps which will help for policies and recommendations

Step (1) Company Overview: Starbucks Corporation, an American company founded in 1971 in Seattle, WA, is a premier roaster, marketer and retailer of specialty coffee around world. Starbucks has about 182,000 employees across 23,768 company operated & licensed stores in 62 countries including 13,107 stores in the United States. Their product mix includes roasted and handcrafted high quality with premium priced coffees, tea, a variety of fresh food items and other beverages. They also sell a variety of coffee and tea products. Starbucks also markets its products mix with other brand names within its portfolio of companies, which include Teavana, Tazo, Seattle's Best Coffee, and Starbucks VIA, Starbucks Refreshers, Evolution Fresh, La Boulange and Verismo. Starbucks had total revenue of $21.31 billion as of September 2016. Value Driver: The core competence of Starbucks has been its ability to effectively control their product differentiation strategies by offering a premium product mix of high quality beverages and snacks, this is the value driver that maintain competitive advantage over other companies in the same industry. One of the major value driver in the future of Starbucks is the expected growth in USA and worldwide, as the retail coffee and snacks store industry is now forecasted to grow at an annual rate of 4% over the next five years, with a potential to reach $35.1 billion revenues in the US. Starbucks dominates the industry with a market share of 36.7%. Starbucks future growth would be mainly driven by increase in consumer confidence and expanding menu offerings. Risk Driver: There is an expected shift towards healthy eating and diet among the consumers in the recent years, and this could be a potential threat to the industry as they become more aware of issues related to weight and obesity. There has been a proactive shift among the industry participants to tailor their menus towards more organic and healthy products mix. Another risk that could Starbucks facing from its closest competitors, creating significant pressure on Starbucks. Consumers with no cost can switch to another competitor with cheaper prices, however, it's important to note that Starbucks maintain some competitive advantage with premium products and services which make this risk low to moderate. Corporate financial issues/challenges: Capital market imperfections are important sources of value creation for Starbucks financial management. Starbucks management has announce that the unauthorized access, theft or destruction of customers, employees, and financial data was impacting the brand and expose the firm loss of revenues. The company managed to maintain developing and implementing systems and processes that are designed to anticipate cyber-attacks and to prevent or minimize breaches of the information technology systems in order to minimize asymmetric information at very minimum level. Other financial challenges might affect Starbucks is the coffee and dairy commodity cost volatility which can influence profitability, as well as labor and occupancy cost inflation. Corporate financing strategies: Starbucks faces financing ability associated with its international expansion efforts as it planning to invest in new global locations. Starbucks has been growing its stores aggressively. For example, the company registered a nearly 40% increase in the number of its stores between 2012 and 2016. Especially in China. Since 2012, the company has added more than 7,000 stores (both franchisee and company operated stores) and had more than 25,000 stores by the end of 2016. For the year fiscal year2016, Starbucks has invested $446 million to buy new fixed asset, but had decrease of networking capital with $456 million, and it paid amount of $ 1,178 million in dividends. Hence the total usage of fund equal $1168 million, while the company generated a cash flow $4,575 million from operation, so the company did not account for external financing to fund its core business operation. Another market amplification is noticed in regard to the company capital structure policy. The firm has continually increasing the leverage ratio from about 9% in 2012 to reach 35% at the end of fiscal year 2016. Step (2) Starbucks Corporation is public company listed in NASDAQ as (SBUX) in the restaurant industry. In the last few years, Starbucks Corp (SBUX) has entered into a competition, with rivals such as McDonald's for the top position as in the food industry. Each company is fighting to expand menu options and physical store locations to reach and better serve a greater customer base and draw consumers away from the competition. McDonald's has been selected for analysis as a competitor to SBUX as both firms have similarity in size, sales and revenues. McDonald's one of the world's leading global food service retailer with over 36,000 locations in over 100 countries. McDonald is listed in NYSE market index as MCD. Moreover, Panera Bread Co has being selected as a competitor to in this financial analysis. Panera Bread Co Corporation is a public company; it's listed in NASDAQ as (PNRA) like Starbucks. As of September 27, 2016, there are 2,024 Panera bakery-cafes in 46 states. Financial Ratio (1) Market Cap SBUX 86,625 Mil PNRA 7,108 Mil MCD 119,823 Mil US Overall firm Average --------------- Interpretation: Firm Size : SBUX & MCD are considered Large-Cap, as Market Cap is greater than $10B , whereas, competitor PNRA company is Mid-Cap (2) Leverage Ratio 35.25% 58.71% 108% (negative total Equity) 20 - 30 % Interpretation Step (1) Compared to Overall firm: SBUX has average ratio within the US firms average , this ratio does not suggest risk of distress Step (2) Compared to competitors: SBUX has lower leverage when it compared to PNRA and MCD competitors It suggest that SBUX should not have possible risk of financial distress Financial Ratio SBUX PNRA MCD US Overall firm Average (3) Current Ratio 1.04 0.69 1.39 2 to 2.5 Interpretation: Step (1) Compared to Overall US firms: liquidity lower than US firms average of 2-2.5 % and close to the critical threshold of 1. Step (2) Compared to competitors: SBUX has higher liquidity than PNRA competitor, but lower than MCD. However, SBUX with liquidity close to 1 (critical value) but still without significant risk of financial distress Financial Ratio SBUX PNRA MCD US Overall firm Average (4) Asset Turnover 1.59 2.01 0.71 0.5 to 2 Interpretation: Step (1) Compared to Overall US firms: SBUX has an average efficiency within the overall US firms Step (2) Compared to competitors: SBUX is within the ratio of Asset turn-over that of industry peers That mean SBUX is working efficiently within the industry peers and the average US firms. (5) ROA 21.05% 10.48% 13.59% +9 to +10% Interpretation: Step (1) Compared to Overall US firms: SBUX has higher operating performance than the overall US firms Step (2) Compared to industry competitors: SBUX has higher ROA than that of PNRA competitor as well as MCD. It reveals that SBUX has good operating performance and it is performing better than its industry peers. Financial Ratio (6) ROE SBUX 48.16% PNRA 37.04% MCD 191.93% (negative total Equity) US Overall firm Average +10 to +11% Interpretation: Step (1) Compared to Overall firm: SBUX has higher profitability than the overall US firms Step (2) Compared to PNRA competitor: : SBUX has higher ROE than PNRA competitor Financial Ratio SBUX PNRA MCD US Overall firm Average With positive and high ROE, SBUX is generating high profit in compared to the money shareholders have invested. It has good corporation's profitability and it is performing better than its industry peers Financial Ratio SBUX PNRA MCD US Overall firm Average (7) Payout Ratio 42.7% 0 66.9 % 30 to 40% Interpretation: Step (1) Compared to Overall US firms: , SBUX has similar percentage of dividends paid to the total earning to that of the overall US firms ( 30 - 40% ) Step (2) Compared to PNRA competitor: PNRA does not distribute dividends, while MCD is higher payout ratio than SBUX. However, comparing to US firms and industry figures, SBUX still has high dividends payments percentage which can give good indication of lower information asymmetry and would improve corporate governance. Financial Ratio (8) Forward P/E SBUX 24.3 PNRA 34.9 MCD 21.8 US Overall firm Average 13 to 15 Interpretation: Forward P/E measures the stock Price compared to forecasted earnings ratio, analysts compare today's price against estimated earnings for the next 12 months Step (1) Compared to Overall firm: SBUX has high price per earnings ratio than the overall US firms suggest that the company has high growth opportunity. Step (2) Compared to PNRA competitor: SBUX has lower forward P/E than PNRA competitor and higher that of MCD. However, SBUX with that high forward P/E ratio, will have good growth opportunities, low financial risk and high market valuation. Financial Ratio SBUX PNRA MCD US Overall firm Average (9) Price/Book 15.4 25 -------1 to 1.5 Ratio Interpretation: Price/Book is a ratio used to compare a stock's market value to its book value. Step (1) Compared to Overall firm: SBUX has high share market price relative to book value if compared to the overall US firms Step (2) Compared to PNRA competitor: SBUX has lower price/book ratio industry competitor as well as lower than restaurant industry average (18.5%) However, SBUX P/B ratio of (15.8%) still close to the restaurant industry average (18.5%) led that suggest an average growth opportunities and lower investment risk in compared to other US firms and restaurant industry peers. Financial Ratio SBUX PNRA MCD US Overall firm Average (10) Number of 10 9 10 3 to 4 Analysts Interpretation: Number of Analysts: number of financial professionals who covers the corporation stock, large size company stock usually covered by multi analysts to perform financial analysis for the its share as a core part of the job Step (1) Compared to USA Overall firm: SBUX has more share analysts number if compared Financial Ratio SBUX PNRA MCD US Overall firm Average to the overall US firms which give investors more information about company business which mitigate the information asymmetry between the company management and other shareholders. Step (2) Compared to competitors: SBUX has similar number of analysts of industry peers. Hence, SBUX has high number of analysts covering its stock which is a good sign to reduce the information asymmetry. Financial Ratio SBUX PNRA MCD US Overall firm Average (11) Institutional 69.27 % 94.75% 68.26% 20 -30% Ownership (% of Shares Held by Institutions) Interpretation: Institutional ownership: Ownership stake in a company that is held by large financial organizations like mutual and pension funds. Step (1) Compared to Overall firm: SBUX has high institutional ownership percentage compared to the overall US firms which give investors indication of good monitoring and corporate governance by those institutional organization. Step (2) Compared to competitors: even though SBUX has lower institutional ownership percentage than that of PNRA competitor, however is still with a similar percentage compared to other industry competitors like MCD. With High institutional ownership percentage usually these intuitions are able to perform in-depth analyses and maintain a dialogue with the company's board of directors to boost the share value for the shareholders. Financial ratios Leverage ratio (%) 2012 2013 2014 2015 2016 9.72 22.48 27.98 28.75 35.25 Liquidity ratios Current ratio 1.90 1.02 1.37 1.19 1.04 1.71 1.51 1.48 1.65 1.59 30.49 28.44 27.59 28.39 28.65 17.76 0.08 18.57 23.77 21.05 29.15 0.17 42.41 49.73 48.16 Efficiency ratios Asset turnover Receivables turnover Profitability ratios Return on assets (ROA) % Return on equity (ROE)% Market ratios Earnings per share ($/share) Market Imperfections (I) Information asymmetry (II) Agency Costs (III) Corporate Governance and Control 0.90 0.01 1.35 1.82 Financial Analyses SBUX has significant number of analysts (10) covering its stock which is a good sign to reduce the information asymmetry between company management and other shareholder and would increase investors confident. Intangible assets do not account a large amount of total assets, intangible assets to total assets ratio less than 3.6%, therefore, it is generally good for shareholders to see a company increasing its assets regularly without increasing intangible assets, such as goodwill. Starbucks regularly announces dividend payment which is very effective to reduce asymmetric information. For example Starbucks declared Cash dividends of $0.850 per share in 2016 fiscal year that is Dividend Yield of 1.5%. Starbucks experienced a positive Free Cash Flow for the last 5 years with annual average of 1,438 million in the period from 2012 to 2016, as a result there is no indication of agency cost. Executive compensation was raised by 6.2% (from nearly $44.51 million to $47.46 million) in the previous five years, while the stock price increased by approximately 33% (from less than $40 to $60 at present), in the same time the revenue increased by nearly 37% to hit amount of $21.316 Billion, Thus, the current managerial compensation structure does not reveal any sign of excessive managerial compensation not aligned with shareholder value. However, one incident of Starbucks agency problem shows the impact when managers do not appropriately represent the best interests of shareholders. Starbucks' chief financial officer (CFO) in November 2012 admitted tax avoidance issue in some European countries. As a result the European Commission anti-trust regulator launched an investigation of Starbucks tax practices in Europe. The investigation ended in October 2015, with ordering Starbucks to pay up to 30 million in overdue taxes. SBUX has high institutional ownership percentage (69.96%) compared to the overall US firms which give investors indication of good monitoring and corporate governance by those institutional organization. these institutions perform in-depth financial analyses and maintain a dialogue with the company's board of directors to increase the share value for the shareholders. Starbucks founder and CEO (Howard Schultz) also serves as the Chair of the board of directors. Similarly, Kevin Johnson, president and chief operating officer also 7-year member of the Starbucks Board of 1.90 Directors. This position duality problem would affect the independency of board of directors and decrease their role in monitoring and supervision. Starbucks has being paying high percentage of dividends for its shareholders (In 2016, the payout ratio was 42.7%) provide good indication of proper corporate governance (IV) Financial Distress (V) Market inefficiency Leverage ratio was 35% (which is less than the critical threshold of 40%), that matching the situation throughout the previous five years. During the past five years, The liquidity ratio has never been less than the critical value of (1). These indications of no financial distress would be predicted. Check "Alpha" using CAPM Forward P/E ratio (24.3) is lower than the current P/E ratio (31.4), it means analysts are expecting earnings to increase and suggest no over-valuation of the company value. Based on FCF valuation model the Firm Value Per share ($63.88) is greater than the current market stock price ($61.36)