Additional Funding for Starbucks
As businesses expand their scale of operations, there is need to obtain additional funds that would facilitate the growth. An expansion program of most businesses aims at increasing the sales level of the an entity. To generate additional sales, a business need to increase the asset and capital base. It is for the reason that businesses use assets to generate sales and these assets are funded by the available capital. Therefore, an increase in income generating assets increases sales (Eugene and Ehrhardt 530). Computation of additional funding needs is of utmost importance for a business which intend to expand. After ascertaining the additional funds needed, an organization needs to look for economical ways of obtaining the funds. It is important to note that the factors that determine the additional funds needs varies. Further, management needs to ascertain whether an organization is operating at full capacity. This would help evaluating whether there is the need to acquire additional machinery and equipment. This may increase the additional funds needed. Calculation of additional funded needed is shown below.
Additional funds needed = Forecasted increase in sales – unstructured upsurge in
liabilities – increase in retained earnings (Eugene and Ehrhardt 532)
Additional funds needed can also be obtained by using the data for the forecasted income statement and balance sheet statement. Calculation of the additional funds needed will be based on a number of assumptions as listed below.
Assumptions
- Cost of sales including occupancy cost, store operating expenses, general and administrative expenses will increase at the same rate as sales increase that is, 14% in 2013, 11% in 2014, 8% in 2015, 7% in 2016, 6% in 2015, and 5% in 2018.
- It is assumed that the amount of profit retained is constant at $505.16 during the period of the forecast.
- Sales will increase according to the rates used for forecasting.
- Accounts receivable, inventory, accounts payable and fixed assets will increase at the same rate as sales increase that is, 14% in 2013, 11% in 2014, 8% in 2015, 7% in 2016, 6% in 2015, and 5% in 2018.
The assumptions will help ascertain whether the company will require additional funds or whether the expansion program will generate excess cash. When using this approach, it is necessary to obtain the amount of total assets and liabilities & equities which are directly affected by the sales during the period of the forecast. The sum of total liabilities and shareholders’ equity is deducted from the total assets to ascertain whether the organization will require additional funding or the company has excess cash (Eugene and Ehrhardt 536). The table below summarizes workings or additional funds needed.
From the table, it is evident that the amount of total assets exceeds the total amount of liabilities and equities in 2013 and 2014. These differences denote the additional funds needed to increase the sales. However, for 2015 to 2018, total liabilities and equity exceeds the amount of total assets. This implies the organization has adequate capital that is required to acquire the value of total assets which is adequate to generate the projected growth in sales. This implies that the company has excess cash and does not require any additional funding to generate the forecasted sales. In summary, it is evident that the additional funding is required for only two years that is 2013 and 2014 (Eugene and Ehrhardt 539).
Value of equity for McDonalds and Starbucks
The value of equity denotes the value of a company that is attributed to shareholders. The value is obtained by summing up together the value of an entity and all investments less debt and minority interest. Computation of the value of the equity of an entity shows the value of a firm. This value is of great importance to investors since it guides them in knowing which companies to invest in. This further helps them in minimizing risks and increasing risks. The value of equity can either be expressed either as market value or intrinsic value. The value of equity per share is obtained by diving the value of equity by the total number of outstanding shares. To calculate the value of equity it is of essence to obtain the cost of capital. Cost of capital is an aggregate rate of return required by all providers of capital.
Estimation of cost of capital for Starbuck Corporation
Cost of debt after tax = 6.5% (1 – 0.32) = 4.5%
Cost of equity (using CAPM method) = 3.2% + 1.2 (5%) = 9.2%
Total debt = 549.5million
Total equity = 4,384.9milion
Debt + equity = 4,934.4
The weight of debt = 549.5/4934.4= 0.1113
Weight of equity = 4,384.9/4,934.4 = 0.8886
Cost of capital = 0.1113*4.5% + 0.8886*9.2%
0.5011+ 8.1755 = 8.68%
Cost of capital for Starbucks corporation is approximately 9%.
Estimation of cost of capital for McDonalds Corporation
Cost of debt after tax = 6.7% (1 – 0.294) = 4.7%
Cost of equity (using CAPM method) = 6.2% + 0.41 (5%) = 8.25%
Total debt = 12,500.40million
Total equity = 14,390.20million
Debt + equity = 26,890.60
The weight of debt = 0.4649
Weight of equity = 0.5351
Cost of capital = 0.4649*4.7% + 0.5351*8.25% = 6.57%
Cost of capital for McDonalds corporation is approximately 7%.
To compute the value of equity, present value of future cash flow is first computed using the cost of capital estimates above. The tables below show the computation of equity value per share for Starbuck Corporation.
The equity value per share = Equity value/number of shares outstanding
The tables below show the computation of equity value per share for McDonald Corporation.
Since the unlevered cash flow is computed from earnings after interest the net debt is excluded from the computation of equity value, thus the present value of unlevered cash flow is the same as the equity.
The equity value per share = Equity value/number of shares outstanding
Projected and historic economic profitability
Economic analysis deals with the allocation of scare resource and analysis of opportunity cost. Economic profitability denotes the difference between income received from the sale of a commodity and the opportunity cost of the factors of production. It is different from the accounting profitability which is the difference between income from the sale of a commodity and the cost of production of the commodity. Economic profit is attained by deducting the cost of capital from the net operating profits after tax obtained in a given financial year (Bruner, Kenneth and Schill 76). Calculation of historic and projected economic profits for Starbucks corporation is shown in the tables below.
Continuation.
Calculation of historic and projected economic profits for McDonald corporation is shown in the tables below.
Continuation.
Works Cited
Bruner, Robert, Kenneth Eades, and M. Schill. Case Studies in Finance: Managing for Corporate Value Creation, USA: McGraw Hill, 2003. Print.
Eugene, Brigham, and M. Ehrhardt. Financial Management: Theory and Practice, Mason: Thomson South-Western, 2008. Print.
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