Question

Please calculate the present value of Starbucks Corp. using it's free cash flow (FCF = cash flow from operating activities - cash flow from investment activities).

Use it's cash flow statements from 2005 to 2019; Necessary Economic conditions are as follows: Discount rate 5%, Growth Rate 2%, Inflation Rate 2%.

Provide 3 limitations of this method you found while applying it to Starbucks (e.g. limited application, assumptions on future, regression analysis, etc.)

Starbucks Annual Free Cash Flow 2019 3,240.40 2018 9,961.40 2017 2016 2,732.40 3,257.60 2,454.30 -553.10 2015 2014 2013 1,757.10 2012 894.10 2011 1,197.90 2010 1,264.20 2009 985.90 2008 274.20 2007 250.90 2006 360.40 2005 279.62

Be sure to provide rationales for why you think it's a limitation. Please also use Excel Spreadsheet.

Answer 1

We have given the free cash free cashflow of Starbucks from 2005 to 2019.

Discount rate is - 5 % , Growth rate - 2 % and Inflation rate is 2%

We assume the cash flows given are real cash flow which does not incoporate inflation into account.

Hence we will be converting the cash flows in to nominal cash flows by adjusting for inflation which means the values will go up by 2% every year

Discount rate given is company's nominal discount rate and hence we will discount the nominal cash flows at this discount rate (5 %) to calculate the present value.

It is assumed that the cash flow projection of star bucks already takes care of the growth rate.

Year	Real Cash Flow	Nominal Cash Flow	Present Value at 2005
		Inflation of 2%	Nominal Discount of 5%
2019	3240.4	4275.64	2159.49
2018	9961.4	12886.13	6833.79
2017	2732.4	3465.34	1929.63
2016	3257.6	4050.42	2368.19
2015	2454.3	2991.78	1836.69
2014	-553.1	-661.01	-426.09
2013	1757.1	2058.72	1393.42
2012	894.1	1027.04	729.90
2011	1197.9	1349.03	1006.67
2010	1264.2	1395.78	1093.63
2009	985.9	1067.17	877.96
2008	274.2	290.98	251.36
2007	250.9	261.04	236.77
2006	360.4	367.61	350.10
2005	279.62	279.62	279.62
		NPV	20921.14

The above table computes the NPV by summing up the discounted cash flows which comes out to be 20921.14 $

The main limitations in applying this method to NPV calculation are,

1. It has been assumed that inflation is constant over this long period where as it might vary over the years.

2. Discount rate i.e cost of capital has been considered constant for the company which might change depending on company's situation.

3. There would be certain amount of risk/uncertainty in the cash flows of the company that has not been accounted for.