Question

In: Finance

Between about December 2007 and June 2009, the United States was considered to be in a...

Between about December 2007 and June 2009, the United States was considered to be in a recession. The U.S. Gross Domestic Product fell approximately 3% from the third quarter of 2008 to the third quarter of 2009. Also, during December 2007 and June 2009, the Standard and Poor’s 500 index dropped by 38% and the unemployment rate climbed from 5% to 9.5%.

The macroeconomic situation affected almost all companies since higher unemployment affected personal consumption, which dropped from 10,140.3 Billion Dollars in Aug 2008 to 9,807 Billion Dollars in June 2009, a drop of 3.8 percent.

Starbucks is one of the companies affected by the December 2007 recession. The following table shows several ratios for Starbucks corresponding to the years 2006, 2007, and 2008. Use a stock price of 10.9 dollars per share for the year 2009.

Year

2006

2007

2008

2009

ROE

0.253

0.294

0.127

ROA

0.106

0.126

0.056

ROIC

0.207

0.250

0.121

Asset Turnover

1.758

1.761

1.830

Op. Profit Margin

0.115

0.746

0.048

Long Term Debt Ratio

0.0009

0.241

0.221

D/E Ratio

0.987

1.340

1.277

Current Ratio

0.970

0.787

0.798

Quick Ratio

0.462

0.466

0.482

Payout Ratio

0.000

0.000

0.000

Plowback Ratio

1.000

1.000

1.000

Market to Book Ratio

6.088

3.099

1.374

Stock Price Used for Mark/Book

17.71

9.450

4.68

By using the financial statements provided, calculate the ratios presented in the table for the year 2009 and answer the following questions:

e-      In what ratio can you see the change in the mix of debt and equity reflected?

g-       Did the quick ratio increase or decrease between the years 2007 and 2009?

h-      Explain why you expect the quick ratio to increase or decrease during a recession?

j-        What areas should Starbucks improve for the years 2010 onwards, if any?

Annual report:

http://media.corporate-ir.net/media_files/irol/99/99518/SBUX_AR.pdf

Expert Answer

Solutions

Expert Solution

Year 2006 2007 2008 2009
ROE 0.253 0.294 0.127 Net earnings/Total equity 390.8/3045.7= 0.128
ROA 0.106 0.126 0.056 Net Earnings/Total assets 390.8/5576.8= 0.070
ROIC 0.207 0.25 0.121 EBIT/Total assets-Current liabilities 559.2/(5576.8-1581)= 0.140
Asset Turnover 1.758 1.761 1.83 Sales/Total assets 9774.6/5576.8= 1.75
Op. Profit Margin 0.115 0.746 0.048 EBIT/Total Sales 559.2/9774.6= 0.057
Long Term Debt Ratio 0.0009 0.241 0.221 LT Debt/Total assets (549.3+400.8)/5576.8= 0.170
D/E Ratio 0.987 1.34 1.277 Total liabilities/Equity 2531.1/3045.7= 0.831
Current Ratio 0.97 0.787 0.798 Current assets/Current Liabilities 2035.8/1581= 1.288
Quick Ratio 0.462 0.466 0.482 (Current assets-Inventories)/current laibilities (2035.8-664.9)/1581= 0.867
Payout Ratio 0 0 0 Dividends/Net earnings 0 0
Plowback Ratio 1 1 1 1-Payout ratio 1 1
Market to Book Ratio 6.088 3.099 1.374 Market price/Book Value
Stock Price Used for Mark/Book 17.71 9.45 4.68 10.9
e. Debt /equity ratio reflects the change in the mix of debt & equity --- the ratio has decreased by 1.277-0.831=0.446--ie.outside debt has decreased as well as equity(Retained earnings) has increased
g.Quick ratio has steadily increased between 2007 & 2009 --almost doubled in 2009--meaning more liquid assets to meet the current obligations.
h. The quick ratio increases during recession because firms tend to pay off its current liabilities,by encashing all the available liquid current assets ( as it is almost a-nil-growth-period) -- thus mathematically, the numerator increases while the current liabilities in the denominator ,decreases.Naturally the ratio increases.
f. The only point can be ROE has decreased in the last two years--due to increase in the equity base. A slight improvement in asset utilisation ,ie. $ sales generated can be helpful.
As in recession, liquidity seems to have improved because of cashing of current assets.

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