In this report, two different parts will be covered:
On the first part, we are considering of using Dividend Discount Model (DDM) is a main method to determine the share price of Starbucks. Our model is developed by using the past figure which is the financial statement of the third quarter 2012. Then, after arriving at the share price of $45.6, our recommendation is wait and not to buy it now. We also include in the report the comparison of our price and other analyst’s price. Several assumptions have been made for our model as well. An ethics report has also been compiled in relation to two scenarios. In each scenario the team has evaluated the behavior and determined whether it was ethical and in compliance with the CFA Guidelines. In Scenario One an analyst is pressured into making a hasty forecast report. This is unethical under the CFA Best Practice Guidelines Governing Analysts. The forecast reports were under researched, incomplete, and cause any recommendations made from the reports to be an unfair representation of the firm and could negatively influence investors. In Scenario Two, the team evaluated the actions of Mr Hintz in a conflict of interest case. While Mr Hintz was trying to act ethically he did not meet the standards set by the CFA Professional Code of Conduct. The team then assessed possible alternatives available to Mr Hintz for selling his stocks and policies which employers could put in place to prevent unethical situations like this occurring.
Part I: Equity Valuation
This report provides an evaluation of equity of Starbucks Corporation, a biggest coffee house chain in the world, which has 19,972 stores across 60 countries (September, 2012). Main operating activities of Starbucks are selling drip brewed coffee, espresso-based hot drinks, teas, coffee beans, salads, hot and cold sandwiches and panini, sweet pastries, snacks, and items such as mugs and tumblers. In 26 June 1992, Starbuck launched its first initial public offering (IPO), which price at $ 17 and quickly rise to $33 within 3 months. Starbuck became the most successful IPO of the year and had a strong capital to expand its business from 500 stores to thousands stores nowadays. Nowadays, Starbucks are becoming a global company, which expands its business to over the world and earning billions of dollars each year. Summary
* Dividend discount model (DDM) is the most appropriate method which has been used for the calculation of the stock price. * We estimate Starbucks (SBUX) stock price for today, 12th of October, to be arrived at $45.6. * The closing price of Starbucks share reported by finance.yahoo.com at 12th of October is $47.18 * Based on our calculation and estimate, we found that Starbuck’s share price is overpriced; the recommendation is that you should not buy the stock. Furthermore, if you are currently holding it, there would be some profit for selling it.
DDM is superior because the most important implication is to determine the fair value of a stock price, whether it is over-priced or underpriced, based on dividend paid, and comparing this calculated price to current price market. Based on that, the manager can make decision whether buy, sell or hold the stock to make arbitrage profit. Moreover, DDM is relatively easy to use since it requires fewer calculations. Therefore we can update the predicted price on a more frequently basis. However, a major shortcoming of the model is that it works best for a stock that already pays dividends. But almost two-thirds of publicly traded companies don't pay dividends. But for analyzing Starbucks, we considered that DDM is suitable as they are one of the one-third companies that pay dividend. Furthermore, compare to others, Starbucks seem to experience a more stable growth, which is the condition that DDM works best. The only thing that may lead to errors is that DDM requires a lot of assumptions.