Starbucks' 744.8 million shares traded at $49.74 each when its financial statements for fiscal year 2011 were released. The reformulated version of the income statement and balance sheet are below. Unless otherwise indicated, use a required return of 9% in answering the questions below.

a.Calculate core return on net operating assets for 2011 (Core RNOA) using average balance sheet amounts in the calculation.

b.Break this Core RNOA down into core profit margin and asset turnover. How much in net operating assets does Starbucks hold to maintain a dollar of revenue?

c.Forecast residual operating income for fiscal year 2012 based on the forecast that Core RNOA will be the same in 2012 as it was in 2011.

d.Value the common equity based on this forecast with a forecast that residual operating income after 2012 will grow at a rate of 4% per year. Assign a value of $48 million to the noncontrolling interest.

e.Value the common equity with the forecast that Starbucks will maintain the same profit margin and asset turnover in future years as in 2011 but that sales growth will be at a pace of 6% per year.

f.What is the market's forecast of this residual operating income growth rate given you have a hurdle rate of 9%?What is the market's forecasted growth rate if you see the required return as 12%?

g.If you forecast that the core RNOA and asset turnover in 2011 will be maintained in the future, what is the market's forecast of the sales growth rate in the future. Use a 9% hurdle rate.

Reformulated Income Statement, 2011

(in millions of dollars)

Net revenue11,700.4

Cost of sales4,949.3

Gross margin6,751.1

Core operating expenses

Store operating expenses (3,665.1 - 36.2) 3,628.9

Advertising Expenses141.4

Other operating expenses260.6

Depreciation and amortization523.3

General and administrative expenses636.15,190.3

Core operating income from sales, before tax1,560.8

Tax reported563.1

Tax on interest income(11.0)

Tax on non-core income (17.7)534.4

Core operating income from sales, after tax1,026.4

Other core operating income

Income from equity invitees (reported after tax)173.7

Core operating income, after tax1200.1

Other operating income (non-core, unsustainable)

Before-tax items:

Gain on sale of properties30.2

Gain from acquisition of joint ventures55.2

Unrealized loss on trading securities(2.1)

Impairment losses(36.2)

47.1

Tax @ 37.5%17.7

After-tax items:29.4

Unrealized loss in OCI(4.8)

Translation loss(6.5)

Net loss on exercise of stock options(13.0)5.1

Operating income1,205.2

Net Financial Income

Interest income62.8

Interest expense33.3

Net interest29.5

Tax @ 37.5%11.0

Net interest offer tax18.5

Unrealized gain on debt investments0.418.9

1,224.1

Noncontrolling interest(2.3)

Comprehensive income to common1,221.8