Problem Set 1

Lecture 1 (Chapters 1-3)

Deadline: October 26, 23:59, via Toledo (more on this below)

Important: no hand-written (scanned) solution will be accepted–you must type your solution
and submit it in a .pdf format. Group size: 4-5 persons per group. If you wish to be in a
bigger (but no more than 6 persons) or smaller group (e.g., working individually) you need
to contact me first to obtain my permission to do so–do not forget to provide a reason for why
you want to have a larger or smaller group. Submission is via Toledo in the same folder in
which this assignment is published. Every student submits his or her assignment regardless of
how many persons are in a working group (if there are 4 students in a group then each group
member submits an identical solution).

Problem 1
Find the most recent financial statements for Starbucks Corporation (SBUX) on the
company’s website: www.starbucks.com (in ”investor relations,” go to
https://investor.starbucks.com/press- releases/financial-releases/). Answer the following
questions:
1) What is the value of Starbucks’ total assets in 2020 and 2021? Is the difference between
2020 and 2021 primarily due to changes in current or long term assets? Explain which
item of the current or long-term assets changes drastically between 2020 and 2021?
Provide 2-3 sentences why you think this happened.

Total assets of Starbucks in 2020 is $29,375.5 and in 2021 $31,392.6. The difference is primarily due to
changes in current. The total current assets in 2020 was $7,806.4 while in 2021, the total current assets
was $9,756.4. The cash and cash equivalents changed drastically between 2020 and 2021. This can be due
to Corona, in 2020, a lot of Starbucks were closed or had less customers.
2) Define financial leverage as the ratio total debt (total liabilities), D, to total equity (share-
holders’ equity/deficit), E,–that is, financial leverage = D / E. Financial leverage measures
how much borrowed money is used to finance firm’s assets relative to firms capital (equity).
Higher leverage means that firm relies more on borrowed funds than on its capital to
finance its activities. What is Starbucks’ leverage in 2020 and 2021?
Total liabilities: 2021: 36,707.1 2020: 37.173.9
Total shareholders deficit: 2021: 5,321.2 2020: 7,805.1

Leverage: 2021: 36,707.1/5,321.2= 6.9

2020: 37.173.9/7,805.1= 4.76
3) Look at Starbucks’ CONSOLIDATED STATEMENTS OF EARNINGS–Year Ended–(the same
thing as the net income statement). What is the biggest source of Starbucks’
revenue? What is the largest source of Starbucks’ costs? What was Starbucks’ net
income (net earnings) in 2020 and 2021? Provide 2-3 sentences why you think the
change is so drastic.
Biggest source of Starbucks revenue: company-operated stores
Largest source of Starbucks costs: store operating expenses
In millions: Net income 2020: $ 928.3
Net income 2021: $ 4199.3

Starbucks generated less revenue in 2020, due to corona. Some cost, think of buildings, rent, cars…stayed
the same less income
4) We discussed in lecture 1 (Chapter 2 in the textbook) that cash usage by a
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 corporation in a given year can be viewed through operating, investment, and
financing activities. In the case of Starbucks, which of these activities used up more
cash in 2020 and in 2021? Provide 2-3 sentences why you think this is the case.
Operating activities: 2021: $ 5989,1
2020: $ 1597.8
Investment activities: 2021: ($ 319.5)
2020: ($1711.5)
Financing activities: 2021: $ 2104.8
2020: $ 1664.3
operation costs are drastically lower in 2020 compared to 2021. This can also be explained by corona.
Many Starbucks were closed in 2020, which meant that operation costs were also lower. In 2020, many
investments were needed to comply with the hygiene rules. As a result, the investment costs are much
higher in 2020.

Problem 2
Solve the exercises (6 small problems in total) from the excel file ”Chapter2.xls”. Everything
you need to know to solve this problem can be found in the excel file. The file is available on
Toledo.

Problem 3
Suppose the risk-free interest rate is 3.9%. Answer the following questions:
a. Having $500 today is equivalent to having what amount in one year?
500 * (1+0.039) = $519.5
b. Having $500 in one year is equivalent to having what amount today?
500 / (1+0.039) = $481.23
c. Which would you prefer: $500 today or $ 500 in one year? Does you answer depend on
when you need the money? Why or why not?
I prefer to get de $500 today. I can invest the money today and do something with it so it
will be worth more next year. After a few years, the interest on interest will increase a
lot. The answer does not depend on when I need the money

Problem 4
You run a construction firm. You have just won a contract to construct a government
office building. It will take a year to construct, requiring an investment of $9.78 million
today and $5 million in one year. The government will pay you $22.5 million upon the
building’s completion. Suppose that cash flows and their times of payment are certain, and
the risk-free interest rate is 11%. Answer the following:
a. What is the NPV of this investment opportunity?
NPV= -9.78 – (5/1.11) + (22.5/1.11) = $5.99 million
b. How can your firms turn this NPV into cash today?
The firm can borrow or lend to shift the cash flows through time.

Problem 4
Throughout the 1990s, interest rates in Japan were lower than in the U.S. As a result,
many Japanese investors were tempted to borrow in Japan and invest the proceeds in the
U.S. Explain why this strategy does not represent an arbitrage opportunity.
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 An arbitrage opportunity occurs when it is possible to make a profit without taking any risk or
making any investment. In This case, borrowing in Japan and investing in the US is an investment and
takes risks. The Market in US is a competitive market, so investing is a risk.

Problem 5
Suppose a security with a risk-free cash flow of $154 in one year trades for $137 today.
If there is no arbitrage opportunities, what is the current risk-free interest rate?
$154/$137 = 1.124
The risk-free interest rate is 12.4 percent.