Question 1A
i) What is the price of a 10-year coupon bond paying 6% annually with a current yield-to-maturity of 5 % and a face value of $1,000?
ii) How would your answer change if the yield was 6 %?
Question 1B
i) Calculate the present value of an investment product that promises to pay out a dividend of $500 next year. In the following years (up until, and including year 10) the dividends are expected to grow by 5 % annually. At the end of the 10th year the investment product will be liquidated and the proceeds are paid back to the investor. The liquidation value (in year 10) is expected to be $25,855.47. Assume a discount rate of 3 % per year.
ii) How would your answer change if, instead of liquidating in year 10, the investment product promises to pay a yearly dividend equal to that in year 10 forever?
Question 1C
In 2015 Starbucks Corp reported a dividend of 0.68 USD. The 14 analysts covering the company expect Starbucks to pay a dividend of $0.80 in 2016, and $0.94 in 2017. In 2018, 2019 and 2020 analysts expect the dividend growth to slow, with yearly dividends of $1.05, $1.14, and $1.18 in each of the three years respectively. In 2021 and beyond, the dividends are expected to remain constant at $1.18. Suppose that the discount rate for Starbucks is 5.31 %. What is the value of Starbucks?
Question 2: Starbucks valuation
The balance sheet and income statement for Starbucks is provided below. Assume that 2 % of cash and cash equivalents are used in operations. Based on this information,
A) Calculate the FCFF in the year 2014.
B) Calculate the FCFE in the year 2014.
Assume that growth in FCFE and FCFF is 2.0 % every year starting in 2015. Suppose that the cost of capital is 5 % and the cost of equity is 5.5 %. The number of shares outstanding is 1,480,000,000.
C) Calculate the value of the firm, the value of the equity, and the value of each share using the FCFF approach
D) Calculate the value of the equity using the FCFE approach.
Balance sheet for Starbucks (all numbers in 1000s)
|
Current Assets
|
2013
|
2014
|
Current Liabilities
|
2013
|
2014
|
|
Cash and cash equivalents
|
2,575,700
|
1,708,400
|
Accounts payables
|
1,939,500
|
2,244,200
|
|
Short-term investments
|
658,100
|
135,400
|
Interest bearing debt
|
0
|
0
|
|
Acct. receivables
|
838,700
|
948,400
|
Other current liab.
|
3,437,800
|
794,500
|
|
Inventory
|
1,111,200
|
1,090,900
|
|
|
|
|
Other assets
|
287,700
|
285,600
|
|
|
|
|
Non-Current Assets
|
|
|
Non-Current Liabilities
|
|
|
|
Long Term Investments
|
554,800
|
833,300
|
Long-term debt
|
1,299,400
|
2,048,300
|
|
Property Plant and Equipment
|
3,200,500
|
3,519,000
|
Other non-current liabilities
|
359,800
|
393,900
|
|
Goodwill
|
862,900
|
856,200
|
|
|
|
|
Intangible Assets
|
274,800
|
273,500
|
|
|
|
|
Accumulated Amortization
|
0
|
0
|
|
|
|
|
Other Assets
|
185,300
|
198,900
|
Common Equity
|
|
|
|
Deferred Long Term Asset Charges
|
967,000
|
903,300
|
Common stock
|
349,900
|
65,400
|
|
|
|
|
Retained earnings
|
4,130,300
|
5,206,600
|
|
Total Assets
|
11,516,700
|
10,752,900
|
Total Liabilities and Equity
|
11,516,700
|
10,752,900
|
Income statement (all numbers in 1000s)
|
OPERATING SECTION
|
2013
|
2014
|
|
+
|
Revenue
|
14,866,800
|
16,447,800
|
|
-
|
Cost of Sales
|
6,382,300
|
6,858,800
|
|
=
|
Gross Profit
|
8,484,500
|
9,589,000
|
|
-
|
Selling, General and Admin. Costs
|
5,655,800
|
6,086,800
|
|
-
|
Research and Development
|
0
|
0
|
|
-
|
Other expenses
|
3,154,100
|
421,100
|
|
=
|
Operating Profit (EBIT)
|
-325,400
|
3,081,100
|
|
NON-OPERATING SECTION
|
|
+
|
Investment Income
|
123,600
|
142,700
|
|
CREDITOR'S SECTION
|
|
-
|
Interest Expense
|
28,100
|
64,100
|
|
=
|
Profit/Earnings Before Tax (EBT)
|
-229,900
|
3,159,700
|
|
OWNER'S SECTION
|
|
-
|
Taxes, Current
|
-238,200
|
1,091,600
|
|
=
|
Net Income
|
8,300
|
2,068,100
|
Excerpt from the cash-flow statement (all numbers in 1000s)
|
|
2013
|
2014
|
|
Operating Activities, Cash Flows Provided By or Used In
|
|
Depreciation
|
655,600
|
748,400
|
|
Investing Activities, Cash Flows Provided By or Used In
|
|
Capital Expenditures
|
-1,151,200
|
-1,160,900
|