Starbucks Stock Valuation

1.Estimate the firms stock price using the dividend-discount model: Use an investment source and find: 1) the current dividend; 2) analysts estimate growth rate for the next five to ten years; 3) an alternative growth estimate using the firms historical growth rate or the formula g=ROE x b.

2.Use your estimate of the cost of equity in the WACC for the rE part of your formula: Combine the above information into the dividend-discount model (DDM).

3.Compare your result to the current market price of your firms stock. Provide analysis and an explanation of how they compare and explain any differences you observe.

Notes:

for 1: Note that you are being asked to provide your company's intrinsic stock price using two different equations. Note that to compute the stock price you first have to find the anticipated dividend your company will pay next year. For this method, you will have to use the cost of equity from your WACC calculations.

the problem asks you to calculate the stock price using an alternative growth estimate, such as the one cited (g=ROE x b.)

for 2:you will have two derived stock prices from the two different equations. Some of you will actually come up with a negative intrinsic value, but that may not necessarily mean that you calculated incorrectly. Sometimes it is the tool, not the carpenter, that is to blame.

for 3: For this third part, and before you provide an answer, you will be well served by researching the pros and cons of using dividend models to calculate stock prices. You will likely find some good reasons why the actual stock price is not the same as your calculated prices.