Question

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1. Starbucks had a FCFE/share at the end of last year of $2.72. For this year,...

1.

Starbucks had a FCFE/share at the end of last year of $2.72. For this year, growth is expected to be -9.89%, for years 2 and 3 growth is expected to be 9.95, and then 1.13 thereafter. If the correct cost of equity is 4.63, what is the current price?

2.

Starbucks' FCFF (free cash flow to the firm) is $2.54/share. Using the Gordon Growth model with FCFF, find the value of the firm given constant growth of 1.98%, a weight in equity of 89.0%, cost of equity of 7.91%, after-tax cost of debt of 5.10%.

Solutions

Expert Solution

2).

Weight in Debt = 1-Weight in Equity

= 1-0.89

= 0.11

WACC = Cost of Equity*Weight of Equity + After tax cost of Debt*Weight of Debt

= 7.91*0.89 + 5.10*0.11

= 7.0399 + 0.561

= 7.60%

According to Gordon growth model,

Value of Firm = FCFF0*(1+g)/(r-g)

Where, g is constant growth rate

r is required return

Value of Firm = $2.54*(1+0.0198)/(0.076-0.0198)

= 2.588006/0.0571

= $45.32

jeff jeffy answered 2 years ago
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