Dividends-Based Valuation of Starbucks’ Common Equity

Integrative Case 10.1 projected ?nancial statements for Starbucks for Years 1 through 5. This portion of the Starbucks Integrative Case applies the techniques of this chapter to compute Starbucks’ required rate of return on equity and Starbucks’ share value using the dividends-based valuation model. This case also compares the value estimate to Starbucks’ share price at the time of the case development to provide an investment recommendation. Assume the market equity beta for Starbucks at the end of 2012 was 0.75. Assume that the risk-free interest rate was 3.0% and the market risk premium was 6.0%. Starbucks had 749.3 million shares outstanding at the end of 2012, and the share price was $50.15.

d. Use the clean surplus accounting approach to project the continuing dividend in Year 6. Assume that the steady-state long-run growth rate will be 3% in Year 6 and beyond. = 5 points

e. Using the required rate of return on common equity capital from Requirement a as a discount rate, compute the sum of the present value of dividends for Starbucks for Years 1 through 5. = 5 points

f. Using the required rate of return on common equity capital from Requirement a as a discount rate and a 3.0% long-run growth rate, compute the continuing value of Starbucks as of the beginning of Year þ6 based on Starbucks’ continuing dividends in Year 6 and beyond. After computing continuing value, discount it to present value at the start of Year 1. = 5 points

2012 Dividend payments: -513