Question #1

Using the Starbucks financial statements provided on Blackboard, calculate and interpret the current liabilities ratios (including cash cycle) we discussed in class. Assume 20% of all sales are credit sales.

Question #2

Using the Starbucks financial statements provided on Blackboard, calculate and interpret the long-term liabilities ratios we discussed in class.

Question #3

You are the controller of a firm whose CEO believes that debt should always be used to finance long-term expenditures because interest is tax deductible. List and describe other benefits to debt financing. Also, list and describe risks to using debt.

Question #4

a)Given the following information, calculate the firm?s WACC:

Tax rate:30%

Debt rate:6%

Preferred stock dividend rate:10% of $100 par value

Risk-free rate of return:2%

Market rate of return:14%

Stock beta:1.2

Debt value:$50,000,000

P/S value:$15,000,000

C/S value:$35,000,000

b)What would a firm use the WACC for?

STARBUCKS CORP 10-K Income Statement in millions of dollars, except for per share figures Fiscal Year Ended 10/2/2016 9/27/2015 9/28/2014 9/29/2013 Net revenues: Company-operated stores Licensed stores CPG, foodservice and other $16,844.1 $15,197.3 $12,977.9 $11,793.2 2,154.2 1,861.9 1,588.6 1,360.5 2,317.6 2,103.5 1,881.3 1,713.1 Total net revenues $21,315.9 $19,162.7 $16,447.8 $14,866.8 Cost of sales including occupancy costs Store operating expenses Other operating expenses Depreciation and amortization expenses General and administrative expenses Litigation charge (credit) 8,511.1 6,064.3 545.4 980.8 1,360.6 0.0 7,787.5 5,411.1 522.4 893.9 1,196.7 0.0 6,858.8 4,638.2 457.3 709.6 991.3 (20.2) 6,382.3 4,286.1 431.8 621.4 937.9 2,784.1 Total operating expenses Income from equity investees 17,462.2 318.2 15,811.6 249.9 13,635.0 268.3 15,443.6 251.4 Operating income $4,171.9 $3,601.0 $3,081.1 ($325.4) 0.0 0.0 108.0 (81.3) 390.6 (61.1) 43.0 (70.5) 0.0 0.0 142.7 (64.1) 0.0 0.0 123.6 (28.1) Earnings before income taxes Income taxes (benefit) $4,198.6 1,379.7 $3,903.0 1,143.7 $3,159.7 1,092.0 ($229.9) (238.7) Net earnings including noncontrolling earnings Net earnings (loss) attributable to noncontrolling interests $2,818.9 1.2 $2,759.3 1.9 $2,067.7 (0.4) $8.8 0.5 Net earnings attributable to Starbucks $2,817.7 $2,757.4 $2,068.1 $8.3 $1.91 $1.90 $1.84 $1.82 $1.37 $1.35 $0.01 $0.01 Weighted average shares outstanding: Basic (adjusted for split) Diluted (adjusted for split) 1,471.6 1,486.7 1,495.9 1,513.4 1,506.3 1,526.3 1,498.5 1,524.5 Cash dividends declared per share $0.850 $0.680 $0.550 $0.445 Gain from acquisition of joint venture Loss on extinguishment of debt Interest income and other, net Interest expense Earnings per share - basic Earnings per share - diluted STARBUCKS CORP 10-K Balance Sheet in millions of dollars As of 10/2/2016 9/27/2015 9/28/2014 9/29/2013 Current assets: Cash and cash equivalents Short-term investments Accounts receivable, net Inventories Prepaid expenses and other current assets Total current assets $2,128.8 134.4 768.8 1,378.5 350.0 $4,760.5 $1,530.1 81.3 719.0 1,306.4 334.2 $3,971.0 $1,708.4 135.4 631.0 1,090.9 285.6 $3,851.3 $2,575.7 658.1 561.4 1,111.2 287.7 $5,194.1 Long-term investments Equity and cost investments Property, plant and equipment, net Deferred income taxes, net Other long-term assets Other intangible assets Goodwill 1,141.7 354.5 4,533.8 885.4 417.7 516.3 1,719.6 312.5 352.0 4,088.3 1,180.8 415.9 520.4 1,575.4 318.4 514.9 3,519.0 1,220.7 198.9 273.5 856.2 58.3 496.5 3,200.5 1,244.3 185.3 274.8 862.9 TOTAL ASSETS $14,329.5 $12,416.3 $10,752.9 $11,516.7 LIABILITIES AND SHAREHOLDERS EQUITY Current liabilities: Accounts payable Accrued litigation charge Accrued liabilities Insurance reserves Stored value card liability Current portion of long-term debt Total current liabilities $730.6 0.0 1,999.1 246.0 1,171.2 400.0 $4,546.9 $684.2 0.0 1,755.3 224.8 983.8 0.0 $3,648.1 $533.7 0.0 1,514.4 196.1 794.5 0.0 $3,038.7 $491.7 2,784.1 1,269.3 178.5 653.7 0.0 $5,377.3 Long-term debt Other long-term liabilities Total liabilities 3,202.2 689.7 $8,438.8 2,347.5 600.9 $6,596.5 2,048.3 392.2 $5,479.2 1,299.4 357.7 $7,034.4 Shareholders equity: Common stock ($0.001 par value) Additional paid-in capital Retained earnings Accumulated other comprehensive income/(loss) 1.5 41.1 5,949.8 (108.4) 1.5 41.1 5,974.8 (199.4) 0.7 39.4 5,206.6 25.3 0.8 282.1 4,130.3 67.0 Total shareholders equity Noncontrolling interests 5,884.0 6.7 5,818.0 1.8 5,272.0 1.7 4,480.2 2.1 5,890.7 $14,329.5 5,819.8 $12,416.3 5,273.7 $10,752.9 4,482.3 $11,516.7 ASSETS Total equity TOTAL LIABILITIES AND SHAREHOLDERS EQUITY STARBUCKS CORP 10-K Cash Flows in millions of dollars Fiscal Year Ended 10/2/2106 9/27/2015 OPERATING ACTIVITIES: Net earnings including noncontrolling interests $2,818.9 $2,759.3 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization 1,030.1 933.8 Litigation charge 0.0 0.0 Deferred income taxes, net 265.7 21.2 Income earned from equity method investees (250.2) (190.2) Distributions received from equity method investees 223.3 148.2 Gain resulting from acquisition/sale of equity in joint ventures & certain retail operations (6.1) (394.3) Loss on extinguishment of debt 0.0 61.1 Stock-based compensation 218.1 209.8 Excess tax benefit on share-based awards (122.8) (132.4) Other 45.1 53.8 Cash provided/(used) by changes in operating assets and liabilities: Accounts receivable (55.6) (82.8) Inventories (67.5) (207.9) Accounts payable 46.9 137.7 Accrued litigation charge 0.0 0.0 Stored value card liability 180.4 170.3 Other operating assets and liabilities 248.8 261.5 Net cash provided by operating activities $4,575.1 $3,749.1 9/28/2014 9/29/2013 $2,067.7 $8.8 748.4 0.0 10.2 (182.7) 139.2 (70.2) 0.0 183.2 (114.4) 36.2 655.6 2,784.1 (1,045.9) (171.8) 115.6 (80.1) 0.0 142.3 (258.1) 23.0 (79.7) 14.3 60.4 (2,763.9) 140.8 418.3 $607.8 (68.3) 152.5 88.7 0.0 139.9 422.0 $2,908.3 INVESTING ACTIVITIES: Purchase of investments Sales of investments Maturity and calls of investments Acquisitions, net of cash acquired Additions to property, plant and equipment Cash proceeds from sale of equity in joint ventures Other Net cash used by investing activities (1,585.7) (567.4) 680.7 600.6 27.9 18.8 0.0 (284.3) (1,440.3) (1,303.7) 69.6 8.9 24.9 6.8 ($2,222.9) ($1,520.3) (1,652.5) 1,454.8 456.1 0.0 (1,160.9) 103.9 (19.1) ($817.7) (785.9) 60.2 980.0 (610.4) (1,151.2) 108.0 (11.9) ($1,411.2) FINANCING ACTIVITIES: Proceeds from issuance of long-tem debt Principal payments on long-term debt Cash used for purchase of noncontrolling interest Proceeds from issuance of common stock Excess tax benefit from exercise of stock options Cash dividends paid Repurchase of common stock Minimum tax withholdings on share-based awards Other Net cash used by financing activities 1,254.5 848.5 0.0 (610.1) 0.0 (360.8) 160.7 191.8 122.8 132.4 (1,178.0) (928.6) (1,995.6) (1,436.1) (106.0) (75.5) (8.4) (18.1) ($1,750.0) ($2,256.5) 748.5 0.0 0.0 139.7 114.4 (783.1) (758.6) (77.3) (6.9) ($623.3) 749.7 (35.2) 0.0 247.2 258.1 (628.9) (588.1) (121.4) 10.4 ($108.2) Effect of exchange rate changes on cash and cash equivalents Net increase/(decrease) in cash and cash equivalents CASH AND CASH EQUIVALENTS: Beginning of period End of the period SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the period for: Interest, net of capitalized interest Income taxes, net of refunds (3.5) $598.7 (150.6) ($178.3) (34.1) ($867.3) (1.8) $1,387.1 1,530.1 $2,128.8 1,708.4 $1,530.1 2,575.7 $1,708.4 1,188.6 $2,575.7 $74.7 $878.7 $69.5 $1,072.2 $56.2 $766.3 $34.4 $539.1