Starbucks' Most Recent (Dec 2016) Book Value Capital Structure

Starbucks' Outstanding Debt as of 4/19/2017

Type

%

Amount

Debt

35.5

3.2 Bil

Equity

64.5

5.8 Bil

Starbucks' Selected Market Data as of 4/19/2017

Last Price

Day Change

Beta

Shares Outstanding

Market Cap

Name

Maturity Date

Amount $(Mil)

Price

Coupon %

Coupon Type

Callable

Rule 144A

Yield to

$59.04

0.69 | 1.18%

0.7

1,457.40 Mil

86.045 bil

(Fixed/Floating)

Maturity %

Starbucks 6.25%

8/15/17

550

110.3

6.25

Fixed

No

No

1.32

Tax Rate

MKT Risk Premium

L-T Treasury Yield

Starbucks 2%

12/5/18

350

100.9

2

Fixed

No

No

1.47

30%

6%

2.86%

Starbucks 2.1%

2/4/21

750

100.8

2.1

Fixed

No

No

1.89

Starbucks 2.7%

6/15/22

500

102.2

2.7

Fixed

No

No

2.24

Starbucks 3.85%

10/1/23

750

108

3.85

Fixed

No

No

2.51

Starbucks 2.45%

6/15/26

500

96.7

2.45

Fixed

No

No

2.86

Starbucks 4.3%

6/15/45

350

107.4

4.3

Fixed

No

No

3.87

Guidelines

a) Answer the following questions using the book value and market value data for Starbucks given above.

b) Use this file to state and explain your responses. Make sure you show your calculations to back up your responses.

1. What is the most recent book value capital structure for Starbucks? That is, what is the percentage of book value debt and of equity most recently used by Starbucks?

2. Calculate the total market value of outstanding debt for Starbucks. The market value of the first issue, for example, is currently 110.3% of face value. Add up the market value of all issues.

3. Calculate the market value of equity of Starbucks as of 4/19/2017.

4. Given the total market value of outstanding debt and equity for Starbucks, wht is the market value capital structure? That is, what is the percentage of market value debt and equity most recently shown for Starbucks?

5. What is the cost of long-term debt for Starbucks assuming they can issue new bonds at the yield to maturity of the longest-term currently outstanding bonds?

6. Estimate the cost of equity by calculating the minimum required rate of return on equity using the capital asset pricing model: Rs = Rf + (market risk premium) Beta.

7. Calculate the weighted average cost of capital (WACC) for Starbucks assuming that the book value capital structure is used to finance investments.

8. Calculate the WACC for Starbucks assuming that the market value capital structure is used to finance investments.

9. Interpret the meaning of the WACC irrespective of which capital structure weights you used in the estimation.

10. Which estimated WACC would better reflect Starbucks' marginal cost of capital? Explain your choice.

Please try to answer at least 2, 4, 5, 7, 8, and 10