Between about December 2007 and June 2009, the United States was considered to b
ID: 2779845 • 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
ROA
0.106
0.126
0.056
ROIC
0.207
0.250
0.121
Asset Turnover
1.758
1.761
1.830
Op. Profit Margin
0.115
0.746
0.048
Long Term Debt Ratio
0.0009
0.241
0.221
D/E Ratio
0.987
1.340
1.277
Current Ratio
0.970
0.787
0.798
Quick Ratio
0.462
0.466
0.482
Payout Ratio
0.000
0.000
0.000
Plowback Ratio
1.000
1.000
1.000
Market to Book Ratio
6.088
3.099
1.374
Stock Price Used for Mark/Book
17.71
9.450
4.68
By using the financial statements provided, calculate the ratios presented in the table for the year 2009 and answer the following questions:
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
ROA
0.106
0.126
0.056
ROIC
0.207
0.250
0.121
Asset Turnover
1.758
1.761
1.830
Op. Profit Margin
0.115
0.746
0.048
Long Term Debt Ratio
0.0009
0.241
0.221
D/E Ratio
0.987
1.340
1.277
Current Ratio
0.970
0.787
0.798
Quick Ratio
0.462
0.466
0.482
Payout Ratio
0.000
0.000
0.000
Plowback Ratio
1.000
1.000
1.000
Market to Book Ratio
6.088
3.099
1.374
Stock Price Used for Mark/Book
17.71
9.450
4.68
Explanation / Answer
a. No sales per dollar were not impacted by recession. In fact sales per dollar increased on a year to year basis during that period.
b. The ratio that shows the impact on sales per dollar is the assets turnover ratio. Assets turnover ratio = Net sales/Average Total Assets
c. Operating profit margin decreased fro, 2007 to 2008 from 0.746 to 0.048. Numbers for 2009 not provided in the table.
d. Mix of debt and equity can be gauged from the D/E ratio or the debt/equity ratio. The ratio witnessed a steady increase from 2006 to 2007 and then fell during the period 2007 to 2008. From 0.987 in 2006 it increased to 1.340 in 2007 and then fell to 1.277 in 2008.
e. The ratio is D/E ratio or debt to equity ratio.
f. Value added by management decreased steadily. Market to book ratio was 6.088 in 2006. It fell to 3.099 in 2007 and then to 1.374 in 2008.
g. Quick ratio has been increasing during the period. It was 0.462 in 2006, increased to 0.466 in 2007 and then further increased to 0.482 in 2008.
h. Quick ratio = (current assets – inventories)/current liabilities. During recession the accounts receivables tend to rise as customers are unable to clear their dues on time.
i. (For this question none of 2009 figures are provided. The 2009 column in the table provided is completely blank).
j. Starbucks should improve its profitability as gauged from ROA, ROE and ROIC. All these ratios have almost halved from 2006 to 2008. The company’s operating profit margin has more than halved from 0.115 in 2006 to 0.048 in 2008.
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