The Capital Budgeting Project : Starbucks Essay

Target Corporation was founded in 1902 and headquartered in Minneapolis, Minnesota. Target Corporation operates general merchandise and food discount stores throughout the United States. The company’s products range from household essentials, to electronics, to toys, to apparel and accessories, to home furnishings, to food and pet supplies. Most of the merchandise is sold under Target and SuperTarget trademarks, but it also sells under private-label brands, such as Archer Farms, Circo, Merona, and Room Essentials. The company also offers merchandise through programs like ClearRx, Great Save, and Home Design Event. Additionally, Target markets its merchandise under license and designer

External Environmental Analysis of Starbucks and the Coffee Industry Harold Brown Strategic Management March 3, 2011

Starbucks financial statements were analyzed for the fiscal year ended September 27, 2015. Like all public companies, annual and quarterly financial statements are required to allow regulators and other interested parties to analyze the financial status and management decision making of the company. This analysis focuses on the results of Starbucks most recent published annual report containing their balance sheets, statement of earnings and cash flows. These statements will be analyzed against the results of one of its competitors, Dunkin Donuts, to investigate how the two companies compare to each other. It was noted that Starbucks and Dunkin Donuts do not have corresponding fiscal year ends. The data therefore is not directly comparable since the reports do not reflect the same time period of data but should provide additional insight. The paper will attempt to provide a brief analysis of Starbucks operations in terms of its liquidity, leverage, activity, profitability and growth ratios used by analysts in the industry.

2) Garthwiate, Craig; Busse, Meghan; Brown, Jennifer; Merkley, Greg “Starbucks: A Story of Growth” Harvard Business Publishing, July 2012.

Starbucks is known for their Frappuccino’s; unfortunately they are on a downward spiral in sales due to competitors such as McDonalds. In 2008 Starbucks admits to its losses due to their competitors. “Company executives now freely admit that such thinking is largely to blame for the woes that led to Tuesday’s announcement that Starbucks will close 600 U.S. stores and eliminate thousands of jobs. The coffee giant’s missteps have come at a spectacularly bad time, hitting as the economic slump deepens and consumers are seeing their discretionary spending eaten up by rising gas prices and grocery bills (Linn).”

WPC has used a discount rate of 15% to evaluate potential projects for the last 10 years. Many in management are correct in thinking that this rate should be evaluated on a much more frequent basis. The current rate of 15% is much too high considering the yield on treasury bonds has declined from 10% to 5% over the last ten years. In order to calculate the correct discount rate we must first determine what their equity and debt ratios are. As you can see in Exhibit1, in order to find the total value of equity we must multiply the number of total outstanding shares of stock times the market value of each share. Completing this calculation shows us that WPC has $12 billion in outstanding equity. WPC also has $2.5 billion in outstanding debt. If you add the debt and equity together we see that WPC has a total of $14.2 billion in outstanding financing. Assuming the 10 year rate of Government Bonds of 4.60% as our risk free rate and using the Capital Asset Pricing Model we find that that WPC’s return on equity is 11.2% (See Exhibit 1). As stated in the case, Worldwide Paper Company has an A bond rating so we can use the 5.78% for their return on debt. Combining all of these variables in the Weighted Average Cost of

In this assignment, a savvy financial analyst researching companies in which to invest a U.S. publically-traded company that would be a good investment was chosen. After a lengthy search, a company that my family is unduly familiar with, Starbucks, was chosen and in the following pages a financial analysis will be described.

It is probably safe to assume that most households run on a budget and some amount of forecasting, as there are many individuals who might not have an unlimited supply of money. Decisions are made about paying household bills in relation to the income that has been generated. Then comes a point in time when one realizes a need to invest in a home improvement project, this results in an analysis of the finances such as, the expense and benefit of the project. Company’s do the same thing except on a much larger scale. Individuals within a company have to take into consideration some of the same things when determining if a project is applicable. This includes, revenue and expenses, in conjunction with the company’s fixed assets, all of which, assists in creating a budget and forecast of the company’s project’s potential cost and benefit, this analysis is known as capital budgeting. Authors Besley & Brigham of the text book CFIN 4, 4th Edition explain, “Thus, the capital budget is an outline of planned expenditures on fixed assets, and capital budgeting is the process of analyzing projects and deciding (1) which are acceptable investments and (2) which should actually be purchased.” (Besley & Brigham, 2015, pg. 145). Creating a capital budget and forecast that is as close as possible to the realized impact is essential, it should illustrate a true picture of investments anticipated outcome, review the below scenario and see how this concept can quickly change under pressure.

In the United States, there are over 24,000 coffee shops that are determined to provide a coffee experience that keeps customers coming back for more (Espresso Business Solutions, 2015.) With this growing statistic in mind, one can witness the need for coffee products to reach their destination and be served to these business’s loyal customers. In this paper we have conducted greater research on the coffee supply chain network. We will discuss the risks and the best practices that will offset these risks; conduct a financial analysis of Starbucks; evaluate a specific evaluation of Brazil and transportation followed by an evaluation of performance improvements of the coffee supply chain.

Starbucks’ shares have grown more than 1500% over the past decade. Financially, it has been an oak tree in an ever changing economy with customers that have ever changing demands. However, there has been increased concern for the financial viability of the coffee shop a recently announced plan to close down over 600 stores that were said to be underperforming domestically. That means that more than 1,000 jobs will be eliminated. As scary as that is on the local front to top management, the executive staff feels that it is the only way to recover from it’s shocking $108.7M loss for the 2nd quarter this fiscal year.

operation success. Investing into the raw coffee market is not the only niche Starbucks hones in

After find out the results the next step will allow to compute for the taxes, and establish the WACC for the whole company. The discount rate represented by the weighted average cost of capital (WACC) has an important factor in deciding the net present value (NPV) of a project. Calculating the NPV is an important task since it allows the investors to make proper investment decisions. Given that the NPV of a project is positive, then the project is profitable and should be taken, but if the project has a negative NPV, then the project should be rejected. In the evaluations of a project the investors are making an investment decision with the objective of maximizing shareholders wealth.

In general the coffeehouse industry in the United States was experiencing an increase in coffee consumption per capita due to the “Starbucks effect”. At this time Starbucks was operating approximately 20,000 stores in the United States and was living a fast expansion strategy worldwide.

In recalculating PP’s WACC correctly their actual average cost of capital came out to be 11.3% as opposed to the 9% that PP has calculated. This shows that PP underestimated their WACC by 2.3% due to the fact that they set equity at 10%. If PP chooses to continue to use their single cutoff rate based on the company’s overall WACC, they will now have a cutoff of 11.3%. Again, the problem with using the single rate method is that it does not allow use to see, or account for the differences in each division of PP. Another problem with the single cutoff rate is that due to the increased rate PP will invest their funds in higher return projects which will result in higher risk. This risk is a result of only the high-risk divisions being able to exceed the single rate hurdles using the single rate cutoff method.

Coffee is one of the most popular world’s most popular beverages. Almost every person loves coffee. Americans consume 400 million cups of coffee per day, equivalent to 146 billion cups of coffee per year, making the United States the leading consumer of coffee in the world according to Huffington post. If you are a coffee addicts or coffee lover, most likely you will begin every day with a cup of coffee. It’s not a doubtful guess, given that 68 percent of coffee drinkers have a cup within the first hour of waking up. The coffee Shop business industry is growing rapidly, and it seems to be continually growing. With no doubt, our company will definitely generate revenue. “ Sammy’s Barista “ coffee shop will be a modern day coffee shop located in the Pier 39 neighborhood of San Francisco. The cost of starting a coffee shop business is not as costly as opening a restaurant, yet it has a higher profit margin than opening a restaurant. This business plan proposes our investors an opportunity to analyze our range of illustrations and strategic focus. It also contributes a gradually plan for the start up of a business, estimated volume for business, high quality products and profitability.