Business Valuation Report Starbucks’ Corporation

November 29, 2016

Prepared by: Micah Cabagbag Brennan Castro Alex Liu Bommie Quynh Nguyen

TABLE OF CONTENTS

I. Executive Summary 3

II. Understanding the Business and Industry 5

Economic Environment 5

Industry Analysis 5

Company Description 6

III. Valuation Techniques 8

IV. Discounted Cash Flow Method 10

Capital Structure 10

I. Value of Debt 10

II. Value of Equity 11

Cost of Capital 11

I. Cost of Debt 12

II. Cost of Equity 12

III. Weights/Tax 12

IV. Cost of Capital 13

Base Year Free Cash Flow 14

I. Cash Earnings 14

II. Investments 14

III. Change in Working Capital 15

IV. Base Year Free Cash Flow Calculation 15

DCF Valuation, Enterprise Value 16

I. Starbucks Metrics 16

II. Growth Metrics 16

III. Store Revenue Projections/CF Projections 17

IV. Economy Growth 18

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V. Future FCF/5 Year Projections 18

VI. Final Enterprise Value (DCF Analysis) 19

V. Relative Valuation 20

Choosing Comparable Companies 20

I. Valuation Metrics 20

II. Adjustments 21

Overall Relative Valuation 22

VI. Summary of Valuation 24

APPENDIX A: Altman’s Z-Score 26

APPENDIX B: Interest Coverage Ratio 27

APPENDIX C: Calculating Starbucks’ Z-Score 28

APPENDIX D: Value of Debt 30

APPENDIX E: Change in WC 31

APPENDIX F: Comparable Ratios 32

APPENDIX G: 5Y Projections 33

APPENDIX H: Valuation Multiples From 5 Comparable Companies 34

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I. Executive Summary We are given the task to determine the fair market value of Starbucks’ Corporation as of

November 29, 2016. This report utilizes two approaches, the discounted cash flow method

(DCF) and the relative valuation method, to establish an independent assessment of the

company’s value for purposes such as mergers and acquisitions. This report can also be served as

a business appraisal, which is required of the company to obtain loans.

Using COMPUSTAT, we obtained credit ratings for all industrial firms and computed the

interest coverage ratios as well as the Z-Scores for each company (See Appendix A and B). With

an ICR of 51.08 and a Z-Score of 11.09 (See Appendix C for Z-Score’s detailed calculation), we

matched Starbucks with the best suitable debt rating of AA+ and derived at a value of debt of

$7.56 million.

Debt Rating

Debt Rating

ICR 51.08 AA+

Z-Score 11.09 AA-

The fair market value of a company is the present value of all future free cash flows. Using the

discounted free cash flow method, we estimate that the enterprise value of Starbucks is equal to

$56.15 billion. After determining five comparable companies based on size (Sales) and growth

(Sales/EPS), the relative valuation method provides us with two enterprise values. In terms of

revenue, Starbucks’ value is equal to $67.15 billion. In terms of EBITDA, the value is $80.86

billion. Given each of these relative values a 25% weight and the DCF value a 50% weight, we

concluded that the final fair market value for Starbucks Corporation is $65.07 billion.

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As Starbucks Corporation embarks on its new era of growth, we are optimistic that it can

continue to simultaneously execute its strategy to: (1) drive strong same-stores sales, (2) expand

internationally, and (3) build a global consumer packaged goods business with a critical level of

scale. Overall, we believe Starbucks is positioned strongly for future growth and we believe there

is upside that is not reflected in other current valuation. The company’s momentum continues

and we think substantial upside potential exists globally as Starbucks is on the cusp of its next

great inflection point. Analysts continue to hold an Outperform rating for Starbucks with a

valuation midpoint of $70, reflecting a 17.4x forward EV/EBITDA multiple and a 30.6x forward

P/E multiple.

Summary Table: Starbucks Corporation’s Valuation (in thousands)

Value of Debt $7,558

Value of Equity $59,658

DCF Enterprise Value $56,145

Relative Enterprise Value (Revenue) $67,150.87

Relative Enterprise Value (EBITDA) $80,856.79

Enterprise Value $65,074

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II. Understanding the Business and Industry

Economic Environment The U.S. economy remains the largest and most important in the world. Despite a disappointing

first half, the economy strengthened in Q3. Economic analysts have a positive outlook on the

U.S. economy, suggesting a growth of 1.5% for the remaining of 2016 (FocusEconomics) . 1

Consumer spending has been solid over the years. Next year, it is expected to increase by 2.1%.

With the Republican Party controlling the House of Representatives, the Senate and the Oval

Office, close monitoring of potential economic policies from the new administration of

President-Elect Donald Trump will be crucial. The U.S. economy, nevertheless, will continue to

expand steadily.

Industry Analysis NAICS Code: 722515. SIC Code: 5812. The major coffee shop companies include International Coffee & Tea (The Coffee Bean & Tea

Leaf), Peet’s Coffee & Tea, Starbucks, Caffe Nero and Costa. The U.S. coffee shop industry

operates more than 22,000 stores with a combined annual revenue of $12 billion. This is a subset

of the specialty eatery industry, which also consist of retailers specializing in food such as

donuts, bagels and ice cream. The competitive landscape for the coffee shop business largely

depends on consumer taste and personal income drive demand. Therefore, securing prime

locations that guarantee busy store traffic is crucial. The U.S. industry is heavily concentrated

with the top 20 companies generating more than 70% of all sales. So, the barriers to entry are

very high, preventing startups from easily entering the industry.

1 http://www.focus-economics.com/countries/united-states

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The average consumers spend approximately 5.2% of their annual household expenditures on

food and beverages outside of their home. With stable growth in disposable income in the recent

years, consumers are spending more money at coffee shops. The industry is projected to expand,

reaching $46.2 billion in 2021 (IBISWorld). Intense competition among major companies will

continue, driven by the pressure for competitive pricing, introduction of new products that appeal

to the ever-changing lifestyles of the consumers.

Throughout 2016, coffee prices have been rising, 4% YOY. In addition, the cost of dairy has also

grown 12% YOY. If this trend continues, the margins for coffeehouse chains will certainly

reduce.

Company Description Founded in Seattle, Washington in 1971, Starbucks Corporation is a global retailer of coffee, tea

and spices, with more than 24,000 locations in 70 countries. Starbucks’ mission “to inspire and

nurture the human spirit - one person, one cup and one neighborhood at a time” speaks true to

the company’s high quality of coffee and exceptional customer service. Starbucks takes pride in

being an ethically sourced coffee chain. The company offers a range of products: more than 30

blends of premium coffees, handcrafted beverages, Ready-to-Drink (RTD) beverages,

merchandise and fresh food. Starbucks went public on June 26, 1992 at a price of $17 per share,

under the ticker symbol SBUX. The company continues to take full advantage of its international

expansion strategy, with the goal of generating half of its total revenue outside the U.S.

There are four main sources of revenue for Starbucks: company-operated stores, licensed stores,

consumer packaged goods (CPG) and foodservice operations. In 2015, company-operated stores

generated 79% of total net revenues. Beverages continue to lead retail sales at 73%, followed by

food at 19%, packaged and single-serve coffees and teas at 3%. The last 5% is for other items

including merchandise, serveware, etc. Licensed stores accounted for 10% of total net revenues

last year. Under this model, Starbucks receives reduced share of the total store revenues in the

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forms of loyalties and license fees, with minimal share of costs as costs are primarily incurred by

the licensees. Another way Starbucks makes money is by selling equipment to the licensees.

America has the most licensed stores, followed by Asia and lastly EMEA. Sales of CPG account

for 8% of total net revenues. Revenues from food service accounts for 3% of total net revenues.

In this model, Starbucks sells its products to institutional foodservice companies that service

many different retailers.

Despite the rising cost of dairy and coffee prices, Starbucks has been successful at minimizing

price fluctuations as about 90% of its coffee are already locked at slightly-favorable price. The

company just recently introduced their Fall menu, with new food and beverage options that have

been be well-received by customers thus far. Furthermore, Starbucks has also revised their My

Starbucks Rewards program from being frequency-based to spending-based, which encourages

customers to spend more money at each visit. This has led to higher revenue streams for the

company as they are able to retain their loyal customers and get them to spend more, on average,

per each visit.

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III. Valuation Techniques

To value Starbucks Corporation, we utilized two approaches: Discounted Cash Flow Analysis

and Relative Valuation Analysis.

In order to value Starbucks using the Discounted Cash Flow technique, we first had to look at a

lot of their numbers located in its 10-K. These numbers included metrics such as revenue,

number of company-owned/licensed stores, and subsequent sales from both types. From there,

we were able to project how these would perform 5 years in the future, as well as key metrics

like adjusted operating income, net capital expenditure and change in working capital. Once we

had best predicted what will happen to Starbucks, we discounted its free cash flows from each

year, in order to find the total enterprise value of the company. This number gives us the best

estimate as to how Starbucks should be valued when looking internally at their fiscal values.

The Relative Valuation Analysis method is a process in which we found companies similar to

Starbucks in terms of size and expected growth. In our analysis, we determined five companies

deemed most comparable to Starbucks according to these metrics, provided an effective

valuation for them, then calculated multiples that gave us a representation of these valuations in

terms of the company’s yearly sales and operating income (EBITDA). The median for both of

these multiples were used to calculate two possible valuations for Starbucks, with considerations

to minor adjustments that needed to be made to take into account the differences between the

comparable companies and Starbucks.

After finding three valuations for Starbucks, one through the DCF method and two through the

Relative Valuation method, we utilized all three to arrive at one valuation for Starbucks. To do

so, we applied weighted assumptions to each method based on which method we believed

provided a more accurate valuation for Starbucks. Since we believe the DCF valuation delivers

the most accurate estimate to value a company, we applied a 50% weight to this value and 25%

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to the valuations provided by the Relative Valuation analysis in order to arrive at our final

valuation of Starbucks.

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IV. Discounted Cash Flow Method

Capital Structure

A firm’s capital structure is how a firm finances its operations and growth. In order to calculate

Starbucks’ capital structure we looked mainly at its 10-K forms and the Federal Reserve

Economic Data (FRED) for government information. Using the information available on the

10-K we were able to calculate the value of debt and equity, and their weighted adjustment

percentages - all of which will be discussed in more detail in the following paragraphs.

I. Value of Debt To find Starbucks’ value of debt we first had to figure out their cost of debt, or the interest rate

on any debt instrument they claimed. To find the cost of debt we took the risk free rate from a

10yr US bond which was 2.17%. On the 2015 10-K, Starbucks reported an EBIT of $3.60

million and an interest expense of $70.50. Dividing the EBIT by the interest expense, Starbucks’

ICR is 51.08. With this value, we matched Starbucks with a AA+ bond rating (See Debt Rating

Table in Executive Summary). Using this we found the appropriate risk premium for Starbucks

which was 1.07%. We then added the risk free rate to the risk premium to get Starbucks’ cost of

debt: 3.24%.

Risk Free Rate 2.17%

Risk Premium 1.07%

Cost of Debt 3.24%

Using Starbucks’ 10-k form we found the face value of Starbucks’ long term debt issuances and

the interest rates of those notes. Their long term debt included 2yr (face value 350 million), 6yr

(face value 500 million), 7yr (face value 750 million), and 29yr (face value 350 million)

issuances with interest rates of 2%, 2.7%, 3.85%, and 4.3% respectively. They also had debt that

matured this year worth 400 million that we added into the final present value of their long term

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debt. Using these interest rates and the cost of debt, we discounted the long term debt. Then we

added in interest paid on the long term debt to get the present value of long term debt, which was

$2,565.36. Starbucks also has lease obligations in 2016, 2017, 2018, 2019, 2020, and 2022. The

face value of these lease obligations are $1,032.4, $892.5, $739.8, $624, $548.9, and $1,831.9

(all in millions) with the same interest rates as long term debt. Using these values we found the

present value of their lease obligations to be $4,992.39. Then we added the two present values to

get Starbucks’ value of debt which was $7,557.75 (See Appendix D).

Present Value of Long Term Debt $2,565.36

Present Value of Lease Obligations $4,992.39

Value of Debt $7,557.75

II. Value of Equity

The value of equity will be calculated at the very end of our analysis once we determine a

valuation for Starbucks. Since our total valuation is the sum of the total value of debt and total

value of equity (less cash), the equity value will be calculated through a simple formula of

adding cash to the derived valuation, then subtracting the value of debt calculated above.

Cost of Capital

The cost of capital is the minimum rate of return that an investor should expect when investing in

a certain company. When calculating Starbucks’ cost of capital, or more specifically their

weighted average cost of capital (WACC), we looked through their 10-K and the FRED. Using

these two data sources we were able to calculate the cost and weight of debt, the cost and weight

of equity, Starbucks’ beta, and the appropriate tax rate. Using all of that information we

calculated their WACC to be 7.09%.

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I. Cost of Debt

The cost of debt was previously calculated in the “Capital Structure” section above to be 3.24%.

II. Cost of Equity

Cost of equity is calculated by adding the risk free rate to the product of a company’s beta and

the market risk premium. First we got the risk free rate by taking the interest rate on a 30yr

government bond which was 2.46%. The next step was to calculate Starbuck’s beta. We did this

by using several analyst calculations. We used Finviz, Yahoo Finance, Google Finance, and

Reuters. The betas that they had calculated for Starbucks were 0.76, 0.66, 0.79, and 0.78

respectively. We took the median of these four numbers to get our beta of 0.77. Finally, we took

the 90yr market risk premium from a data sheet that was provided for us. With all of this data we

were able to calculate the cost of equity to be 7.77%

30yr US Treasury rate 2.46%

Beta 0.77

90yr Market Risk Premium 6.90%

Cost of Equity (Ke) 7.77% III. Weights/Tax

The final step in calculating Starbucks’ WACC was to calculate the weight of their debt and

equity and to find their tax rate. We used the information from their 10-K to find all of this

information. First we found the weight of their debt (Wd) by calculating their debt to capital

ratio. We found this to be 0.12 or 12%; then to find the weight of their equity (We) we subtracted

their weight of debt from 1 to get a weight of equity value of 0.88 or 88%. Finally, Starbucks

stated in their 10-K that they predicted their tax rate for 2016 to be between 34 and 35%, so we

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used an average of the two to get a tax rate of 34.5%. Using this information and the information

above we calculated Starbucks’ WACC, which can be seen in the chart in the section labeled

cost of capital.

Cost of Debt (Kd)

Estimated cost of debt 3.24%

Effective tax rate 34.50%

Cost of Debt (Kd) 2.12%

Cost of Equity (Ke)

30-Year US Treasury Yield 2.46%

Beta 0.77

Market risk premium (90 Yr) 6.90%

Cost of Equity (Ke) 7.77%

Weighted Percentage of Capital

Debt/Capital Ratio 0.12

Equity/Capital Ratio 0.88

WACC 7.09%

IV. Cost of Capital

The following table highlights the final calculation for WACC utilizing the calculated cost of

debt, cost of equity, their weighted percentages, and the tax rate:

Cost of Debt (Kd) 3.24%

Weight of Debt (Wd) 12%

Tax Rate (T) 34.5%

Cost of Equity (Ke) 7.77%

Weight of Equity (We) 88%

WACC= Kd*Wd*(1-T) + Ke*We 7.09%

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Base Year Free Cash Flow When finding Starbucks’ cash flow for 2015, we had to go through and calculate other metrics in

order to best estimate this number. This meant finding the individual values for its cash

earnings, investments, and change in working capital (WC). Finding these numbers allowed us

to find its total free cash flow for the year. (All numbers in millions)

I. Cash Earnings To find the cash earnings for Starbucks, we first took their Earnings Before Interest and Taxes

(EBIT), which we had found off of its 10-K, added back their financing charges as well as

investment charges. To calculate its financing charges, we first took $5,669.5, which is

Starbucks’ operating lease obligations and multiplied it by 3.24%, which is its cost of debt as a

percentage, and we had found that previously in our assignment. For the investment charges, we

were given the number to work with. Once we added all the numbers up, this gave us our

Adjusted EBIT, after which we just subtracted its taxes, and that final value gave us Starbucks’

After Tax Cash Earnings, equalling $2,994.42.

EBIT $3,903

Add financing charge $183.69

Add investment charge $51.4

Minus Taxes -$1,143.7

After Tax Cash Earnings $2,994.42

II. Investments In order to find out the total investments for Starbucks, we had to normalize the values for its

capital expenditure, depreciation, and acquisitions. We normalized these numbers by taking

their values for these categories of the past 5 years and taking them as a percentage of that year’s

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total revenue. Once we got all these values, we subtracted depreciation from capital expenditure,

and when we had that number, we added up that, the normalized acquisitions, the change in the

value of the lease (yr 2015-yr2014), and the investment charge in order to find our Net Capital

Expenditure.

Capital Expenditure $1,248.47

Depreciation $877.33

(Capital Expenditure-Depreciation) $371.13

Acquisitions $269.43

Change in Value of Lease $568.81

Add Back Any Investment Charge $51.43

Net Cap Ex $1,260.80

III. Change in Working Capital To calculate the change in WC that Starbucks had, we had to look up the 5 year values of its

inventories, accounts receivable and accounts payable. After adding all these numbers up for

each year, we found the change year over year by seeing the difference of the new year

subtracted by the value of the previous. After that, we took the total revenue for each of those

years and found what percent of revenue the change in WC was. We then averaged those

numbers and multiplied it by the revenue for 2015 to find our normalized change in WC, which

worked out to be $236.44. (See Appendix E for full calculation)

IV. Base Year Free Cash Flow Calculation After finally finding all of these values, they all came together by taking our Adjusted EBIT

value, and subtracting Investments and then Change in WC, which gave us the free cash flow for

Starbucks. (For final calculations and comparable ratios, see Appendix F)

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Adjusted EBIT $2,994.42

Minus Investments $1,260.80

Minus Working Capital $236.44

Free Cash Flow $1,497.18

DCF Valuation, Enterprise Value

I. Starbucks Metrics When calculating the metrics for Starbucks’ company-owned and licensed stores, we first

created a table for the last 5 years running of the company’s revenue, EPS, and total number of

stores, which we broke down further into company-owned or licensed.

2010 2011 2012 2013 2014 2015

Revenue $10,707.4 $11,700.4 $13,299.5 $14,866.8 $16,447.8 $19,162.7

Company-Owned

8,833 9,031 9,405 10,194 10,713 12,235

Licensed 8,025 7,972 8,661 9,573 10,653 10,808

II. Growth Metrics After collecting all of the data from the previous 10-Ks, we then found the growth of each value

by looking at the current year’s numbers compared to the previous year. These were expressed

as percentages, and we proceeded to compute the average percent change for the total number of

stores, both company-owned and licensed individually, and finally, the same-store sales that

were also taken from each year’s 10-K.

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Growth % 2011 2012 2013 2014 2015 Average

Revenue 9.27% 13.67% 11.78% 10.63% 16.51%

Company-Owned

2.24% 4.14% 8.39% 5.09% 14.21% 6.81%

Licensed -0.66% 8.64% 10.53% 11.28% 1.45% 6.25%

III. Store Revenue Projections/CF Projections When finding the numbers to see revenue per store, and project the number of new stores,

projected revenue and expected revenue growth, we further separated the company-operated and

licensed stores by finding these projections separately. To find revenue per store, we took the

total revenue that came from each type of store, and divided by the number of old stores.

For the projections, we first looked at how many new stores of each kind would be opened in the

new year, which we found by multiplying the number of old stores by the average new stores

growth we found in the Growth Metrics . Next, we projected revenue for both types of stores by

taking last year's revenue per store and multiplied it by 1 plus the same store sales growth as well

as the number of old stores when added to the number of new stores, divided by 2. We did this

to factor in the revenue added from existing stores as well as the potential new stores to be added

this year, and divided by 2 to reflect that stores open up different times of the year and wanted to

average out those potential sales. Lastly, we projected expected revenue growth for both kinds

of stores by taking our projected revenue, dividing by the current year’s revenue and subtracting

one, to show what total growth will be.

(in millions) Revenue/Store # of New Stores Projected Revenue

Expected Revenue Growth

Company- Owned

$1.24 834 $16,815 10.65%

Licensed $0.17 675 $2,054 10.34%

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IV. Economy Growth When projecting the growth of the total economy via real GDP growth, we found projections for

both nominal GDP growth, and adding that to the inflation rate. These numbers were averaged

over a 6 year future projection in order to show what the market should grow by each year.

2015 2016 2017 2018 2019 2020 Average

Nominal 2.60% 2.80% 2.80% 2.70% 2.20% 2.00% 2.52%

Inflation 0.12% 0.82% 1.54% 2.37% 2.49% 2.34% 1.61%

Real 2.72% 3.62% 4.34% 5.07% 4.69% 4.34% 4.13%

V. Future FCF/5 Year Projections To project the future free cash flows for 5 years into the future, we took the revenue, adjusted

operating income, net capital expenditure, and change in WC to look at. First, to project

revenue, we took the sales growth rate for the first two years, and after that, decreased the rate at

which revenue increased by taking the sales growth rate, subtracting the economy rate, and

dividing by 3, the number of years left to project. We did this to reflect the way in which

companies tend to hover near how the economy performs in the future.

For adjusted operating income, we projected this by looking at what percent of Starbucks’

revenue could be accounted for by adjusted operating income, which came out to be 7.8%. We

assumed that this number would stay constant for the future, and that is how we projected the

adjusted operating income for Starbucks in the next 5 years.

Net capital expenditure was projected by looking using the same first step as adjusted operating

income, and looking at its percent compared to total revenue. When extrapolating that number

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for the future, we reduced that percent by 1.32% per year, because that is how we would get to a

net capital expenditure of 0 in the future, as that is what should happen.

Finally, for change in WC, we used a similar first step, by taking this current year’s value and

dividing by the change in revenue from Starbucks’ current year subtracted by its previous year.

After that, we kept that value constant for the future, as WC isn’t expected to change in the

future.

VI. Final Enterprise Value (DCF Analysis)

After calculating all these values until 2021, we were able to find Starbucks’ free cash flow for

each year, by taking the adjusted operating income and subtracting by both net capital

expenditure and change in WC. We did this for each year as well as finding the present value of

each of the values by dividing by 1 plus Starbucks’ WACC, which was calculated earlier in the

assignment, taken to the power of whatever year in the future it was. We found Starbucks’

terminal value by taking the FCF in 2021 and dividing by the WACC minus the perpetual growth

rate, which was taken from an online source. The present value of the terminal value was also

found using the same method as before. Once this was done, the sum of the present values from

2017 forward as well as the present value of our terminal value is what is known as the enterprise

value of Starbucks when looking 5 years into the future. (See Appendix G for full projections)

2017 2018 2019 2020 2021 Terminal Enterprise

FCF $710.8 $1,143.1 $1,612.3 $2,094.8 $2,181.4 $70,482.3

PV $663.7 $996.6 $1,312.6 $1,592.5 $1,548.4 $50,030.6 $56,144.5

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V. Relative Valuation The second method we used to determine the value of Starbucks was through a Relative

Valuation analysis. During this process, we found five companies who were similar to Starbucks

based on growth and sales. Based off the comparable companies, we calculated effective

multiples and adjustments to determine Starbucks’ relative enterprise value through its most

recent yearly revenue and EBITDA. EBITDA is a company’s operating profit before interest

expenses, taxes, depreciation, and amortization are taken out.

Choosing Comparable Companies Using financial data from the Wharton Research Data Services (WRDS) and Yahoo Finance, we

compiled a list of 70 companies within the same industry as Starbucks. From this list, and after

reading analyst reports from NASDAQ, Macroaxis, and the University of Oregon Investment

Group, we were able to find five companies that were the most similar to Starbucks in terms of

sales and growth. The five companies were: Aramark, McDonald’s Corporation, Chipotle

Mexican Grill Inc., Yum Brands Inc., and Bloomin’ Brands Inc.

I. Valuation Metrics After choosing the comparable companies, we calculated two multiples for each. The two

multiples were a measure of each company’s enterprise value in relation to their 1) sales and 2)

EBITDA.

To calculate the enterprise value for each of the five comparable companies, we used a simple

equation of adding the market value of equity and book value of debt, then subtracting current

cash holdings. The market value of equity was calculated by multiplying each company’s current

share price by the number of shares outstanding, both of which were found on Yahoo Finance.

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The book values of debt and cash data were found by looking at each company’s most recent

10K report.

After calculating the enterprise values for each comparable company, we found two multiples

based on Enterprise Value-to-Sales and Enterprise Value-to-EBITDA. The sales and EBITDA

data were found by adding up the last four quarters of revenues and EBITDA from each

company’s most recent 10Q. We took the median of both multiples to use in our relative

valuation, as shown below:

Valuation Multiples Median based off Comparables

Enterprise Value / Sales 2.7

Enterprise Value / EBITDA 17.2

Appendix H explains how we arrived at these two multiples based off the five comparable companies.

II. Adjustments Since the five companies do not exactly match Starbucks in terms of enterprise value, sales, and

EBITDA, we calculated an estimated adjustment percentage to account for the dissimilarities. To

calculate the adjustment percentage, we compared Starbucks’ Revenues, expected one-year

earnings growth (from nasdaq.com), and operating margins (EBITDA/Revenue) to the medians

of the comparable companies. Large variances were given a ten percent adjustment, while

smaller variances were given an additional 5 percent adjustment.

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Companies Revenue Expected Growth Operating Margins

Starbucks 20,520 18.13% 19.07%

Aramark 14,418 12.80% 4.92%

McDonalds 25,125 9.62% 30.05%

Chipotle 3,867 14.67% 2.78%

Yum Brands 12,894 10.98% 16.67%

Bloomin' Brands 4,319 11.39% 3.95%

Median 13,656 12.10% 10.80%

Adjustment 5.00% 5.00% 10.00%

After comparing Starbucks’ revenues, expected growth, and operating margins to the medians of

all comparable companies, we determined that an additional 20% adjustment was necessary to

apply when calculating Starbucks’ relative valuation.

Overall Relative Valuation Once the multiples and adjustments were calculated, we could find two estimates for Starbuck’s

relative enterprise value based on its revenues and EBITDA:

Enterprise Value (EV) based off Revenue

Starbucks Revenue (thousands)

EV based off 2.7x Multiple

EV after 20% Adjustment

$20,519.5 $55,959.06 $67,150.87

Enterprise Value (EV) based off EBITDA

Starbucks EBITDA (thousands)

EV based off 17.2x Multiple

EV after 20% Adjustment

$3,913.90 $67,380.66 $80,856.79

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Starbucks Enterprise Value through Relative Valuation Method

Relative Enterprise Value (Revenue) $67,150.87

Relative Enterprise Value (EBITDA) $80,856.79

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VI. Summary of Valuation

Once the three calculations for Starbucks Inc.’s total value were computed, we decided to

incorporate all three by finding a weighted enterprise value for Starbucks. The two values found

through the relative valuation method were each given a 25% weight in the overall calculation.

The value found through the discounted cash flow method was given a 50% weight since we

believe this is a more accurate way of figuring out a company’s true value.

After applying the weighted percentages to each of the three values, we arrived at an overall

valuation for Starbucks Inc. to be $65.07 billion.

Method Calculated Valuation (thousands)

Weighted Percentage

DCF Valuation $56,144.47 25%

Relative Valuation (Sales) $67,150.87 25%

Relative Valuation (EBITDA) $80,856.79 50%

OVERALL VALUATION $65,074.15 100%

Value of Equity To find Starbucks’ equity value, we simply added the existing cash balance to the $65.07 billion

valuation, then subtracted the value of debt amount calculated previously in the report. The cash

balance was $2.14 billion while the value of debt was $7.56 billion.

Starbucks’ Valuation Cash Value of Debt Value of Equity

$65,074.15 $2,141.80 $7,557.75 $59,658

Therefore, Starbucks’ value of equity is $59.66 billion.

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Overall Valuation After analyzing Starbucks Inc. through the DCF and Relative Valuation Method, and applying

stated assumptions/adjustments, we have arrived at the following calculations for Starbucks’

Enterprise Value, Value of Debt, and Value of Equity:

Starbucks Inc. Valuation (in thousands)

Enterprise Value $65,074

Value of Debt $7,558

Value of Equity $59,658

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APPENDIX A: Altman’s Z-Score

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APPENDIX B: Interest Coverage Ratio

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APPENDIX C: Calculating Starbucks’ Z-Score

Variable Inputs and Sources:

Input Value Sources

Current Assets $4,352.70 2015 10-K

Total Assets

$12,446.10 2015 10-K

Retained Earnings $5,974.80 2015 10-K

EBIT

$3,601.00 2015 10-K

Current Liabilities $3,653.50 2015 10-K

Total Liabilities $6,626.30 2015 10-K

Net Sales $19,162.70 2015 10-K

Basic Shares Outstanding $1,495.90 2015 10-K

Share Price (on Sep 27, 2016) $57.99 Yahoo Finance

Calculations:

Working Capital = Current Assets - Current Liabilities

Current Assets 4,352.70 Current Liabilities 3,653.50

Working Capital 699.2 Market Value of Equity = Basic Shares Outstanding * Share Price

Basic Shares Outstanding 1,495.90 Share Price (on Sep 27) 57.99

Market Value of Equity 86,747.24 Variables: X1 = Working capital/ Total assets X2 = Retained earnings/ Total assets X3 = Earnings before interest and taxes/ Total assets X4 = Market value of equity/ Total liabilities X5 = Net sales/ Total assets

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Z-Score Calculation: Z-score = 1.2 X1 + 1.4 X2 + 3.3 X3 + 0.6 X4 + 1.0 X5

X1 0.06

X2 0.48

X3 0.29

X4 13.09

X5 1.54

Z-Score 11.09

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APPENDIX D: Value Of Debt

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APPENDIX E: Change in WC

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APPENDIX F: Comparable Ratios

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APPENDIX G: 5Y Projections

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APPENDIX H: Valuation Multiples from 5 Comparable Companies

Starbuck's Comparable Companies

MV of Equity

BV of Debt Cash

Enterprise Value Revenue EBITDA

EV/ Sales

EV/ EBITDA

Aramark $8,920 $$5,433 $197 $14,156 $14,418 $710 1.0 19.9

McDonald's Corp $95,909 $26,010 $3,128 $118,791 $25,125 $7,549 4.7

15.7 Chipotle Mexican Grill Inc $10,701 $0 $154 $10,547 $3,867 $108 2.7 98.0 Yum Brands Inc. $30,530 $9,167 $3,021 $36,676 $12,894 $2,150 2.8 17.1 Bloomin' Brands Inc. $1,802 $1,239 $103 $2,938 $4,319 $171 0.7 17.2

EV / Sales Median 2.7 EV / EBITDA Median 17.2

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