Value and Capital Budget the Reference Company

¶ … Value and Capital Budget

The reference company in this case is Starbucks. The company is currently trading at $53.55 (Yahoo! Finance, 2012). The five-year chart for Starbucks is as follows:

Yahoo! Finance (2012)

The company's current upward trajectory basically began when it rehired former CEO Howard Schultz to run the company again. Since that point in time, Starbucks have seen its former success rate be restored and the share price has been rising steadily (Kaplan, 2011). The improvement in the stock price has been about $10 per year and there is no reason to think that, with a strong economy this year, Starbucks will not continue to see this rate of growth. The futures price for 100 shares of Starbucks one year into the future will be around $65 * 100 = $6,500.

The stock price has been steadily improving. Although Starbucks does have higher than average volatility (beta 1.28), the company's beta was affected by a sharp decline during the years without Schultz as CEO and a sharp increase in the years since his return. There have not been wild swings in the past few years, so none are expected in the next year either. As such, the gentle upward trajectory is expected to continue, delivering a moderate increase in the share price.

Part II:

For a capital project at Starbucks, there are a number of potential obstacles to getting that project funded. The company does have a fairly good cash position right now, but that is just one consideration. The risk level of the project is one of the considerations, as the company is unlikely to take on an expensive high-risk project, but has in the past demonstrated a willingness to take on a high-risk project that has a low initial cost, like its recent purchase of Evolution Juice (Baertlein, 2012). Another consideration is the cost, but very few projects are cost-prohibitive for Starbucks. However, it appears that cost and risk are related, indicating a certain conservativeness within Starbucks' management.

There are some political layers that can delay a project, or make its approval more difficult. Projects that fall within the company's strategy are more likely to be approved. Projects that involve a shift in strategy, like the Evolution project, are more likely to require high-level approval. The types of projects that Starbucks is looking at are unlikely to have significant public relations ramifications, so it is unlikely that projects would be delayed for PR reasons.