FINANCIAL ANASYSIS- 235-Project Analysis ONLY SOLVE PROBLEM 12. PROBLEM 11 IS JUST FOR REFERENCE. 11. Use the Standard & Poor?s Market Insight Web site (www.mhhe.com/edumarketinsight) for this problem. Assume Starbucks Corporation is reviewing the cost of equity and the WACC it uses to evaluate new investments. Management collected the following information as of November 30, 2007: Yield to maturity on debt 5.72% Coupon interest rate on debt 6.25% Tax rate 35% Long-term government bond rate 4.72% Historical excess return on common stocks 6.3% a. Use Starbucks? November 2007 beta to calculate the company?s cost of equity capital. (To find beta go to Excel Analytics, Valuation Data, and Profitability.) b. As of November 2007, calculate Starbucks? WACC. (Hint: For purposes of this exercise, use Total Liabilities as the company?s book value of debt. You can find Total Liabilities on Starbucks? Annual Balance Sheet under Excel Analytics. The common shares outstanding are there as well. For the closing market price check Profitability.) Answer to Problem 11; a. Cost of equity capital = KE= 4.72% + 0.535 X 6.3% = 8.09% b. WACC=Kw= [(1-0.35) (5.72%) (3,059.8) + 8.09 % (26.20 x 738.29)]/ (3,059.8 + 19,343.2) = 7.49% 12. Use the Standard & Poor?s Market Insight Web site (www.mhhe.com/edumarketinsight) for this problem. Assume that Starbucks contemplates selling music online over a Web site, via existing wireless hotspots in its stores. The estimated initial investment in technology and cost of implementation is $69 million, and the expected net increase in annual after-tax cash flow is $7 million in the first year, growing 2 percent a year in perpetuity. Management estimates that this project carries moderately more risk than Starbucks? average project, and believes that the project?s risk is roughly comparable to that faced on typical investments made by Apple Computer Inc. a. Calculate the appropriate discount rate to evaluate this project. You may assume that Starbucks correctly chose the comparable company, and that differences in leverage between Starbucks and Apple have a negligible effect on the analysis. Assume a 35 percent tax rate, 10 percent interest rate on Apple?s debt, and other information as presented in Problem 11, above. (Use Apple?s financial statements for September 30, 2007.) b. Based on management?s projections, should Starbucks invest in this enhancement? c. What would be the consequences of Starbucks using its WACC (computed in Problem 11) to evaluate this project? d. Based on your answers to the preceding questions, what advice would you give Starbucks? management? So, I just want you to solve Problem 12 and include a one page written report describing why you believe the stock is fairly or unfairly valued. USE ANSWER TO PROBLEM 11 AS A REFERENCE TO SOLVE PROBLEM 12 ALSO, PLEASE USE FORMULA AND TECHNIQUES FOR THIS SPREADSHEET. This is an ANALYSIS PROJECT.
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