Question

1. Considering today's financial climate, how likely is it that Starbucks could acquire the capital necessary to support an aggressive value-enhancement strategy? From where would that capital originate? Compared to current interest rates, what do you believe is a realistic interest rate the firm might incur? Which of the liquidity ratios will be impacted by the influx of capital, if borrowed?

Liquidity ratios - Current ratio, Quick ratio, and Inventory to networking capital

Answer 1

I think that Starbucks is not likely to acquire the capital necessary to aggressively support its value entrenchment strategy because this is an adverse economic scenario where there is a lower repayment capability on the hands of the Starbucks.

I think they will be trying to pushback their highly aggressive value entrenchment strategy and they will be trying to gather the capital from equity markets mostly because that market will be highly exposed to a lot of fluctuation and they have a fixed payment so Starbucks can be exposed to a large amount of risk. The current interest rates are not reflective of the true economic scenario because this is a measure which has been taken by the central bank in order to counter the inflation so this will not be sustainable for the long period of time and I think the interest rate will be in higher single digits like 8-9% in order to raise loan through corporate debt

If borrowed funds will be available to the company then liquidity of the company would be lower, because it would have to pay the interest and it could also mean that current ratio will be lower along with the quick ratios and inventory ratios to the net working capital ratios are also lower.