Between about December 2007 and June 2009, the United States was considered to b
ID: 2787170 • Letter: B
Question
Between about December 2007 and June 2009, the United States was considered to be in a recession. The U.S. Gross Domestic Product fell approximately 3% from the third quarter of 2008 to the third quarter of 2009. Also, during December 2007 and June 2009, the Standard and Poor’s 500 index dropped by 38% and the unemployment rate climbed from 5% to 9.5%.
The macroeconomic situation affected almost all companies since higher unemployment affected personal consumption, which dropped from 10,140.3 Billion Dollars in Aug 2008 to 9,807 Billion Dollars in June 2009, a drop of 3.8 percent.
Starbucks is one of the companies affected by the December 2007 recession. The following table shows several ratios for Starbucks corresponding to the years 2006, 2007, and 2008. Use a stock price of 10.9 dollars per share for the year 2009.
Year
2006
2007
2008
2009
ROE
0.253
0.294
0.127
=.128
ROA
0.106
0.126
0.056
=.07
ROIC
0.207
0.250
0.121
=.12
Asset Turnover
1.758
1.761
1.830
=1.753
Op. Profit Margin
0.115
0.746
0.048
=.057
Long Term Debt Ratio
0.0009
0.241
0.221
=.18
D/E Ratio
0.987
1.340
1.277
=.831
Current Ratio
0.970
0.787
0.798
=1.287
Quick Ratio
0.462
0.466
0.482
=.867
Payout Ratio
0.000
0.000
0.000
=0
Plowback Ratio
1.000
1.000
1.000
=1
Market to Book Ratio
6.088
3.099
1.374
=2.658
Stock Price Used for Mark/Book
17.71
9.450
4.68
=10.90
a- Were sales per dollar of assets impacted by the recession?
b- which ratio shows the impact of the recession on sales per dollar of assets?
c- Did the company operating profit margin increased, decreased, or was the same, between the years 2007 and 2009?
d- Did the mix of debt and equity changed for Starbucks between the years 2007 and 2009?
e- In what ratio can you see the change in the mix of debt and equity reflected?
f- Did the value added by management, reflected in market to book ratio, increased or decreased between the years 2007 and 2009?
g- Did the quick ratio increase or decrease between the years 2007 and 2009?
h- Explain why you expect the quick ratio to increase or decrease during a recession?
i- Use the ratios for the years 2007 and 2009 to explain if, in your view, Starbucks is in a better or worse situation in the year 2009 due to the recession.
j- What areas should Starbucks improve for the years 2010 onwards, if any?
Year
2006
2007
2008
2009
ROE
0.253
0.294
0.127
=.128
ROA
0.106
0.126
0.056
=.07
ROIC
0.207
0.250
0.121
=.12
Asset Turnover
1.758
1.761
1.830
=1.753
Op. Profit Margin
0.115
0.746
0.048
=.057
Long Term Debt Ratio
0.0009
0.241
0.221
=.18
D/E Ratio
0.987
1.340
1.277
=.831
Current Ratio
0.970
0.787
0.798
=1.287
Quick Ratio
0.462
0.466
0.482
=.867
Payout Ratio
0.000
0.000
0.000
=0
Plowback Ratio
1.000
1.000
1.000
=1
Market to Book Ratio
6.088
3.099
1.374
=2.658
Stock Price Used for Mark/Book
17.71
9.450
4.68
=10.90
Explanation / Answer
a- Were sales per dollar of assets impacted by the recession?
Ans
The asset turnover ratio indicates the sales generated from assets of the company. The higher the ratio means the sales per dollar of assets is increasing . In 2006 the ratio is 1.758 and in 2007 it is 1.761 .
The recession was from dec 2007 to june 2009 . Technically the data to calculate asset turnover ratio should be 2008 and 2009 . The trend shows increase in ratio to 1.830 in 2008 and decrease in 2009 to 1.753 .
Therefore the recession has not impacted starbucks in its sales per dollar of assets in 2008 but impacted in 2009
b- Which ratio shows the impact of the recession on sales per dollar of assets?
Ans
The ratio of asset turnover ratio in 2009 of 1.753 shows the impact of recession on sales per dollar of assets
c- Did the company operating profit margin increased, decreased, or was the same, between the years 2007 and 2009?
Ans
The operating profit margin in 2007 was 0.746 or 7.46% on sales but it decreased to 4.8% in 2008 and then increased to 5.7% in 2009
d- Did the mix of debt and equity changed for Starbucks between the years 2007 and 2009?
Ans
The mix of debt and equity can be determined by analyzing Debt equity ratio or D/E ratio . the D/E ratio in 2007 was 1.340 which means of each dollar of equity in the company the debt was $1.340 . This ratio was changed to 1.277 in 2008 means a decrease in debt in relation to equity , in 2009 it has decreased to 0.831 , which can be attributed to starbucks repaying its debts in 2008 and 2009 . As it has plow backed all its profits in business may have used this for repayment of debts
e- In what ratio can you see the change in the mix of debt and equity reflected?
Ans
The mix of debt and equity can be determined by analyzing Debt equity ratio or D/E ratio . the D/E ratio in 2007 was 1.340 which means of each dollar of equity in the company the debt was $1.340 .
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