Reference no: EM131214109

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