673 Words Apr 11th, 2006 3 Pages
Starbuck's Inc, Valuation Models

Weighted Cost of Capital (WACC)

The Weighted Average Cost for Capital is calculated using the following formula:
WACC = wdkd(1-T) + was ks The variables for this formula are calculated as followas
wd = Book Value of Debt / [Market Value of Equity + Book Value of Debt]
The book value of debt is calculated by adding up the total of all the debt on the balance sheet. The market value of equity is the "Market
Cap," and equals the number of (common) shares outstanding multiplied by the price/share. The variable ks represents the cost of common equity.
The CAPM can be used for this variable. The weights (wd and was - note that: wd + was = 1; so you only have to calculate one of them).
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This stock price has more than doubled over the past year and this is reflected in the WACC calculation. This type of growth is rare and it is questionable whether it will be maintained. The Cost of Capital takes into account how much a company must pay for financing. This does not only cover long tern debt secured through a bank, but must also take into account financing that is achieved through shareholders. When using the WACC method, stock price will severely effect the Cost of Capital. The CAPM is based on stable market indicators and in this case, is the more accurate indicator for Cost of Capital, due to the unusual increase in stock price reflected in the WACC method.
Starbuck's is in a constant quest to develop more market share by opening more shops and engaging in new endeavors. It is currently trying to enter into online sales of its products. Starbuck's coffee and other products are high priced as compared to other similar products. This limits their potential customer base to the upper income levels. Starbuck's could lower their cost of financing by slowing down their growth and expansion, which requires borrowing capital, and developing a more stable primary customer base, perhaps offering some lower priced items.
Starbuck's has a large amount of money invested in shareholder's equity. This of course makes the shareholders happy, but puts a

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