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Starbuck's Inc, Valuation Models

Weighted Cost of Capital (WACC)

The Weighted Average Cost for Capital is calculated using the following formula:
WACC = wdkd(1-T) + was

The variables for this formula are calculated as followas
wd = Book Value of Debt / [Market Value of Equity + Book Value of Debt] The book value of debt is calculated by adding up the total of all the debt on the balance sheet. The market value of equity is the "Market Cap," and equals the number of (common) shares outstanding multiplied by the price/share. The variable ks represents the cost of common equity. The CAPM can be used for this variable. The weights (wd and was - note

that: wd + was
= 1; so you only have to calculate one of them). We need
to calculate the weight of debt and the weight of equity. In other words, what portion of the company's financing is by debt? The cost of debt (k d); is the rate that Starbuck's will pay based on their credit rating and the yield of a stable market indicator such as the 30 year T-bond. The 30-year T-bond is currently at 5.08%. Starbuck's credit rating is AA, which makes their k d 5.28%. The corporate tax rate ( T ) for Starbuck's is 37.3%. These number were obtained from the Starbuck's Website and are contained the 2001 Annual Report. To calculate WACC we simply plug in the numbers:

wd = $38,650,000,000 / [$9,291,996,469+$38,650,000,000]
wd = 0.806
WACC = (0.801)(.05528)(1-.373)+(1-0.806)
WACC = (.044)( .627 )+(.194)
WACC = 0.22 = 22%

Capital Asset Pricing Model
Risk Free Rate on 30 Year Treasury Bonds as of December 2001 (RF)5.08 %
Beta (B)0.94
Market Risk (S & P since 1947) (RM)8.2%

CAPM=Risk Free Rate + B(RM_RF)
CAPM for Starbuck's = .0508 + .94(.082-.0508)
CAPM for Starbuck's = 8.01%
Choosing Appropriate Discount Rates
The CAPM method in this case gives a more accurate picture of the discount rate that should apply to Starbuck's. The reason being that the formula for WACC takes into...
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