Question

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
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 market/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:

a-       Were sales per dollar of assets impacted by the recession?

a.       Yes

b.       no

b-      , which ratio shows the impact of the recession on sales per dollar of assets?

a.       ROA

b.       Asset turnover ratio

c.       Quick ratio

d.       ROE

c-       Did the company operating profit margin increased, decreased, or was the same, between the years 2007 and 2009?

a.       Increase

b.       Decrease

c.       Did Not change

d-      Did the mix of debt and equity changed for Starbucks between the years 2007 and 2009?,

a.       Yes

b.       no

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

a.       Current ratio

b.       Quick ratio

c.       Debt to equity ratio

d.       Payout ratio

f-        Did the value added by management, reflected in market to book ratio, increased or decreased between the years 2007 and 2009?

a.       Increased

b.       decreased

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

a.       Increase

b.       decrease

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

i-        Use the ratios for the years 2007 and 2009 to explain if, in your view, Starbucks is in a better or worse situation in the year 2009 due to the recession.

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

Answer 1

a. The answer is option “b” – NO. Sakes per dollar of assets = asset turnover ratio. We can see that even after recession in 2008 Starbuck’s asset turnover ratio continued to increase.

b. The answer is option “b” – asset turnover ratio. This ratio is computed using the formula: net sales/average total assets.

c. The answer is option “b” – decrease. In 2007 the margin was 0.746 and this decreased significantly to 0.048 in 2008.

d. The answer is option “a” – Yes. We can see that the company’s D/E ratio declined in 2008 from 2007 meaning debt component reduced after recession.

e. The answer is option “c” – debt to equity ratio.

f. The answer is option “b” – decrease. We can see that the market to book ratio was 3.099 in 2007 and declined to 1.374 in 2008. Hence wealth creation declined following recession.

g. The answer is option “a” – Increase. We can see that quick ratio was 0.466 in 2007 and increased to 0.482 in 2008.

h. I expect quick ratio to increase during recession as during recession the level of accounts receivables will increase (company will find that its debtors are paying longer time to pay). At the same time during a recession the level of inventory being held will decline due to lower expected sales.

i. Clearly Starbucks is in a worse situation. Its profitability ratios like ROE and ROA have declined meaning that the company is earning less return on its equity as well as its assets. Its operating profit margin has also declined. Long term debt ratio and D/E ratio increased after recession and this will lead to higher interest expenses.

j. Starbucks should look to reduce debt in its books from 2010 onwards. This will help it to increase its profit margins and reduce its interest burden. It will also have a positive impact on the company’s ROA and ROE metrics.