We discussed the Starbucks (SBUX) acquisition of Seat- tles Best Coffee Company in 2003. Discuss the relevance of Seattles Bests WACC as the opportunity cost of funds that should be used in valuing the acquisition. What if Starbucks planned to finance the entire $72 million acquisition using cash and Starbucks common stock, thereby using no debt? Does this fact alter your thinking about the appropriate discount rate for valuing Seattles Best? If so, how ?

In the spring of 2003, Starbucks Corporation (SBUX) was analyzing the acquisition of Seattle's Best Coffee Company. At the time, the acquisition suited Starbucks' long-term strategy of expanding and building on its leadership position in the super-premium coffee segment of the foodservice and grocery businesses. However, was Seattle's Best worth the $72 million price tag? To answer this question, Starbucks' management needed to estimate the value of Seattle's Best by forecasting its future cash flows and calculating the NPV of acquiring the company. But what discount rate should Starbucks use to perform this analysis of Seattle's Best Coffee Company? The discount rate that is appropriate for the valuation of a company is known as the firm's (in the above example, Seattle's Best's) cost of capital. This discount rate is used to calculate the firm's overall value, and in some situations, it can be used to evaluate individual investments made by the company. One way to think about the cost of capital is as an opportunity cost. Starbucks can come up with lots of ways to invest $72 million. It can make other acquisitions, repurchase its own stock, or repay some of its debt. The return that is likely to be generated by acquiring Seattle's Best needs to be evaluated relative to these other opportunities. The opportunities that are the most relevant for determining the cost of capital for Seattle's Best are those opportunities that have the same risk as Seattle's Best