Starbucks's finacial analysis - Essay Example

The cost of equity is calculated by the formula: Ce = Rf + (Em-Rf)*b, where The cost of debt of Starbucks is very low as the company has the vision to attain minimum debt. The amount of debt raised by Starbucks is very low. Due to the tax shield, the cost of debt of Starbucks is very low. The tax rate of Starbucks is 32.8%. The cost of equity and the cost of debt of Starbucks are multiplied respectively to the respective proportions of the debt and equity. The weighted cost of debt and weighted cost of equity are added to find the weighted average cost of capital (Yahoo finance, 2013).

The weighted average cost of capital of Starbucks is 11.14%. The earnings before interest and taxes of Starbucks are about 15.7% of the total revenue in 2012. The earnings before interest and tax are the net earnings after operation before interest and taxes are paid (Baker and Powell, 2009). The increase in EBIT over the last three years is depicted in the table given below. The FCF for Starbucks has been calculated below with the help of formula: Net Earnings before paying interest and tax * (1- tax rate) + Amortization and Depreciation – Net change in working capital – Capital Expenditure.

The depreciation and amortization expense of the company consists of the expenses written off by the loss of valuation of its assets due to usage and part of the expenses due to repayment of the loans consisting of principal and interest payments. The depreciation and amortization of the company has increased by 5.56% from 2011 to 2012. The working capital of Starbucks is determined as the net of the current assets after meeting the current liabilities of the company to run its daily operations.

The working capital of Starbucks has changed over the years which could be indicated by the trend of change in working capital over the years (Khan, 2004). The compounded annual growth rate