AC5803 Assignment #3.docx | + Data reviewed Starbucks 2010 2009 2010 2009 2010 A
ID: 2788214 • Letter: A
Question
AC5803 Assignment #3.docx | + Data reviewed Starbucks 2010 2009 2010 2009 2010 All-inclusive degree of 1.0037 1.005o 1.0228 1.0700 financial leverage Diluted earnings per share $2.38$222 $3.62 before nonrecurring items Percentage of earnings $2.78 100.00%,-81.97%---_100.00% . | 2469 2092 $1.24$0.52 retained Dividend yield 64.42% 1.85% 20.87 $49.66 66.20% 2.26% 15.94 100.00% 38.13 $6863 $2594 $19.83 2821 Price/earnings ratio Market price per share Disclosure not adequate to compute $35.38 $102.11 RequiredI a. Comment on all data reviewed for each individual company in terms of G) financial leverage (ii) diluted earnings per share Gii) percentage of earnings retained (iv) dividend yield (v) price/eamings ratio (vi) market price per share [43 marks]Explanation / Answer
Yum Brands:
The financial leverage figures are not provided.
The diluted EPS of the company has increased from $2.22 to $2.38 indicating that the company has improved its profitability.
The percentage of retained earnings has reduced in the year 2010 which shows that the company has given out more percentage of funds as dividends to its shareholders.
Since the market price of shares has increased, dividend yield has reduced. Dividend yield shows the percentage of dividend that the Company gives out to its shareholders relative to its price. Hence even if dividend yield has reduced it is not negative for the Company since the market price of the share has increased.
The P/E Ratio has increased inpite of an increase in EPS which is also essentially due to the higher increase in share price. In brief, the Company is in a favourable position and investors will benefit.
Panera Bread
The degree of financial leverage is the ratio of percentage change in EPS in reponse to a percentage change in EBIT. Since the EPS of the company has improved in 2010, a fall in this indicator implies a lower proportion of debt which is favourable. The share price of the Company has increased substantially. However, Panera Bread has a trend of retaning all its earnings and has not paid any dividend to its shareholders in both the years. It's P/E Ratio has increased which means that the price of the share has increased in a higher proportion than its EPS. For an investor who is looking for short term gains, this seems to be a good stock since the price of the stock is rising and even though there is no dividend he will earn profits.
Starbucks
The market price of the Company has increased and so has its EPS. In response the P/E ratio has reduced which shows that its EPS is rising faster than the price.
The degree of financial leverage has shown a fall. Again this means that the Company is using a lower proprtion of debt which is good for the shareholders. The percentage of retained earnings has reduced which means that Starbucks has given out dividend in 2010 which is why it shows an increase in dividend yield.
b. Based on the above analysis, I would invest in Yum Btrands Inc. As a long term investor I am interested in dividends and hence I rule out Panera Bread. The share price of Starbucks is lower than that of Yum Brands. However, it pays a lower percentage of retained earnings as dividend. Yum Brands has a higher share price but it gives a higher EPS. Also since it also shows a higher profitability trend and higher dividend payout, this share will yield a higher dividend for the investment.
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