Starbuck’s Capm and Sources for Capital
Starbuck’s CAPM and Sources for Capital TUI UNIVERSITY Module 3 SLP FIN301: Principles of Finance Dr. Sharifzadeh August 31, 2011 Starbuck’s CAPM and Sources for Capital By definition beta is a measure of the volatility, or systematic risk, of a security or a portfolio in comparison to the market as a whole. Beta is used in the capital asset pricing model (CAPM), a model that calculates the expected return of an asset based on its beta and expected market returns (Investopedia, 2011).
According to Wikipedia (2011), in finance, CAPM is used to determine a theoretically appropriate required rate of return of an asset, if that asset is to be added to an already well-diversified portfolio, given that asset’s non-diversifiable risk. The model takes into account the asset’s sensitivity to non-diversifiable risk (also known as systematic risk or market risk), often represented by the quantity beta (? ) in the financial industry, as well as the expected return of the market and the expected return of a theoretical risk-free asset. This session long project will analyze Starbuck’s CAPM and sources for capital.
Using Yahoo Finance, it shows that Starbuck’s estimated beta coefficient is at 1. 26 percent: (Ra-Rf)/ (Rm-Rf) = Beta. Starbucks “Beta” coefficient is a measure of the stock’s volatility in relation to the rest of the market. The Beta is calculated for individual companies using regression analysis. The beta coefficient is a key parameter in the CAPM. It measures the part of the asset’s statistical variance that cannot be mitigated by the diversification provided by the portfolio of many risky assets, because it is correlated with the return of the other assets that are in the portfolio (Yahoo Finance, 2011).
In order to be successful, an investor must understand and be comfortable with taking risks. Creating wealth is the object of making investments, and risk is the energy that in the long run drives investment returns. My answer to that is “Beta” may seem to be a good measure of risk; there are some problems with relying on beta scores alone for determining the risk of an investment. Beta looks backward and history is not always an accurate predictor of the future. Beta also doesn’t account for changes that are in the works, such as new lines of business or industry shifts
My three stock portfolios are not sufficiently diversified. For risk to be sufficiently diversified the portfolio should have a 1 to 1. 5 stocks. The stocks should be from all sectors of the economy and not concentrated in specific sectors. In my portfolio: Starbucks, Coca-Cola, and McDonald’s belong to the same sector and so that would not help in diversification. What I need to do is divide the economy in various sectors, such as retail, construction, manufacturing banking etc. and then choose the leading stock from each sector. That way I can build a diversified portfolio (Yahoo Finance, 2011).
When examining the structure and activities in Starbucks organization and identifying two projects or events that required an investment; other than normal operating expenses, cash requirements for the remainder of fiscal 2011 are expected to consist primarily of capital expenditures for remodeling and refurbishment of, and equipment upgrades for, existing company-operated stores, systems and technology investments in stores and in the support infrastructure, and new company-operated stores. Total capital expenditures for fiscal 2011 are expected to range from $550 million to $600 million.
Starbucks expect to use their cash and short-term investments, including any potential future borrowings under the credit facility and our commercial paper program, to invest in our core businesses, including product innovations and related marketing support, and other new business opportunities related to our core businesses. Starbucks believe that future cash flows generated from operations and existing cash and short-term investments will be sufficient to finance capital requirements for our core businesses as well as shareholder distributions for the foreseeable future.
Starbucks may use their available cash resources to make proportionate capital contributions to our equity method and cost method investees. They may also seek strategic acquisitions to leverage existing capabilities and further build our business in support of our growth agenda. Acquisitions may include increasing our ownership interests in our equity method and cost method investees. Any decisions to increase such ownership interests will be driven by valuation and fit with their ownership strategy.
Significant new joint ventures, acquisitions and/or other new business opportunities may require additional outside funding. I’m confident that this source is very accurate with information, data, figures mainly because it’s coming straight from the Starbucks Corporation consolidated financial report of 2011 (Edgar Online, 2011). As of July 3, 2011, Starbucks had committed to purchasing Green Coffee totaling $635 million under fixed-price contracts and an estimated $238 million under price-to-be-fixed contracts.
Price-to-be-fixed contracts are purchase commitments whereby the quality, quantity, delivery period, and other negotiated terms are agreed upon, but the date at which the base “C” coffee commodity price component will be fixed has not yet been established. For these types of contracts, either Starbucks or the seller has the option to “fix” the base “C” coffee commodity price prior to the delivery date. Until prices are fixed, Starbucks estimate the total cost of these purchase commitments.