Paper Topic:

Finance - Cost of Capital for Starbucks Coffee

Finance - Cost of Capital for Starbucks Coffee

1 ) Cost of Capital Section Calculate the cost of capital (show calculations ) for Starbucks using the following

Weighted average cost of capital

Capital-asset pricing model (beta

Weighted average cost of capital

Cost of equity : Re Rf Beta (Rm-Rf

Where

Rf risk free rate

Rm-Rf equity risk premium

Using the latest date from Yahoo finance

Risk free rate 5

Equity risk premium 4 .5

Beta 0 .557

Re 5 0 .557 (4 .5

Re 7 .5

Rd 2

p E /V 0 .77

D /V 0 .23 Where

Re cost of equity

Rd cost of debt

E the market value of the firm 's equity

D the market value of the firm 's debt

V E D

E /V percentage of financing that is equity

D /V percentage of financing that is debt

Tc the corporate tax rate

Re 7 .5

Rd 2

E /V 0 .77

D /V 0 .23

Tc 22

WACC 0 .77 7 .5 0 .23 2 (1-22

WACC 15 .9

Capital-asset pricing model (beta

Kc Rf HYPERLINK "http /www .moneychimp .com /glossary /beta .htm beta x (Km - Rf

where

Kc is the risk-adjusted discount rate (also known as the Cost of Capital

Rf is the rate of a "risk-free " investment , i .e . cash

Km is the return rate of a market benchmark , like the S

500

Return available on an appropriate market benchmark investment (like the S

500 :20

Return available on a risk-free investment (cash , or government bond 7 .5

Beta (relative to the market benchmark above : 0 .557

Kc 7 .5 . 557 (20 -7 .5

Kc 14 .46

Cost of capital for Starbucks calculated by weighted average methods equals to 15 .9 and the cost of capital calculated by the capital-asset pricing model method equals to 14 .46

2 ) Discuss the relative strengths and weaknesses of the methods above as to the appropriate discount rate for the firm

The usage of weighted average cost of capital method may look more complex because it requires a lot of calculations and data that has to be available to make exact calculations . Still it seems to be more reliable by many economists because it gives the most approximated value of the discount rate

The usage of capital-asset pricing model seems to be an easier one because it doesn 't require that many data set for the calculations , but just return of risk-free ' investment , beta and return rate of market benchmark

Still the results of the both methods may be different if different people calculate them . It depends on the objectivism of risk factors calculations that depend upon different financial indexes and conditions

In the case with weighted average cost of capital method it may appear tricky to calculate cost of equity that doesn 't really exist in a difference to the cost of debt

The cost of equity is primary based on what it really costs the company to achieve a share price that will theoretically satisfy the investors...

4 pages

33.5 KB

Free sing-up