1. Two women appear before King Solomon at his palace, along with an infant. Each woman claims that the infant is her child. The child is “worth” 100 dinars to his true mother, but he is only “worth” 50 dinars to the impostor. The king knows that one of the two women is the true mother of the child, and he knows the “values” that the true mother and the impostor ascribe to the child, but he does not know which woman is the true mother, and which the impostor. To determine which of the two women is the true mother, the kind explains to both women that he will implement the following steps:

(a)He will ask the first woman whether the child is hers. If she

answers negatively, the child will be given to the second woman.

If she answers affirmatively, the king will continue to the next

step.

(b)He will ask the second woman if the child is hers. If she answers

negatively, the child will be given to the first woman. If she

answers affirmatively, the second woman will pay the king 75

dinars, and receive the child, and first woman will pay the king

10 dinars.

i. Assume that each woman has a payoff of

0 dinar if she does not

receive the child. Draw the game tree when (a) The first woman

is the true mother and when (b) The second woman is the true

mother.

ii. Find and report the subgame perfect equilibrium under (a) and

(b), and describe what happens (who gets the child and how

much is paid by each woman) in each equilibrium.

2. From the movie A Beautiful Mind :

there are 4 men and 5 women at the bar. There are two types of women γ and ψ . Out of 5 women one is type γ and 4 are

type ψ. Each man decides awoman (γ or ψ) to hit on, simultaneously. Suppose the ψâ€s are equally attractive to the men, with appeal b. The γ is more attractive, with appeal a > b. If more than one man attempts to hit on the γ, they succeed neither with the γ(they block each other), nor with any ψ(the latter feel slighted). Any man choosing not to hit on the γ succeeds with a ψ, for a payoff of b. If a man is the only one who hits on the γ, he succeeds, with a payoff of a. Find all Nash equilibria of this game(both pure and mixed).

3. Suppose there are n firms in the Cournot oligopoly model Let q i denote the quantity produced by firm i, and let Q =q1+…+qn denote the aggregate quantity on the market. Let P denote the market- clearing price and assume that inverse demand is given by P(Q) =γ−Q(assumingQ<γ, elseP=0). Assume that the total cost offirmifrom producing quantityqiisCi(qi) =αq2i+βqi. That is, there are no fixed costs and β<γ.

(a)Following Cournot, suppose that the firms choose their quantitiessimultaneously. What is the Nash equilibrium? What happens asn approaches infinity?

(b)Now assumen=2. Further, assume that the total cost of firm1 isC1(q1) =αq21+βq1and firm 2 isC2(q2) =cq2. Followingthe Cournot model, what is the Nash equilibrium? Under whatconditionq∗1>0?

 

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Part One – (85 points)
 
 
 
Company Introduction: Starbucks, Inc.
 
Founded in 1971 with a single store in Seattle, Starbucks (SBUX) today is connected with millions of customers, more than 20,000 retail stores, located in 65 countries.  Starbucks offers a range of exceptional products that customers enjoy in our stores, at home, and on the go. This includes premium coffee and tea, handcrafted beverages, merchandise including equipment, packaged goods, music, refresher energy drinks, juices and fresh food. Starbucks brand portfolio includes Starbucks Coffee, Seattleâ€s Best Coffee, Teavana, Tazo, Evolution Fresh, La Boulange and Torrefazione Italia Coffee.  SBUX went public in June, 1992 at a price of $17 per share.  As of September, 2014 SBUX earned $16.5 billion in revenue and $2.1 billion in net earnings. [1]
 
Instructions
 
Before analyzing and valuing SBUX, it is important to understand who the company is, what and where it sells, and how the company finances its operations.  For this assignment, assess the following:
 

In the first section, provide a financial overview (Excel**) and brief commentary (text) about the company.  Analyze the performance over the last five years by calculating revenue, operating profit, capex, FCF and earnings growth as well as capital structure,  gross and operating margin, ROIC, ROE, FCF and economic profit . You can make adjustments to the 10-K financials but must explain your reasoning.  This can be done in an appendix in outline format. (60 pts)

Is SBUX sensitive to the economy based on your calculations over this time frame?  Is their growth organic or acquired?  Are most of their sales domestic or foreign? How is the company financed?  Has their capital structure changed over the last several years and if so, how?

What has SBUX done to improve its ROIC over the time period?  What does SBUX view as their competitive advantage?  Do you see any other competitive advantages? Is the company adding positive value over this time period? Is SBUX a market leader in its industry?

In the second section, please provide a financial overview and brief commentary by business segment (by product type and geographic area).   Focus on 2014-2010: what can you learn from the annual report about the strength/ weakness of each segment?  (10 pts)

Using all the information you have analyzed, as well as the comparative ratios given on its competitor, Dunkin Donuts, explain the stock performance of Starbucks versus its competition and the market as a whole. (15 points)

NOTE: Your calculations on excel will answer many of the above questions.  For the written analysis, do not copy your answers form the SBUX annual report or 10k.  Briefly answer the questions.  The majority of the report should be in your own words, but if you use any quotes, make sure to footnote appropriately. The format of the written answers can be in Q&A or paragraph form.  No more than 2-3 pages should be written.  I will only grade up to three pages, in normal font size, double spaced with one inch margins on all sides.

Assume the following:

Invested capital = total debt (not total liabilities) and equity

NOPLAT = EBIT (1-t) with the effective tax rate given on the worksheet

Capital expenditures, change in working capital and non-cash expenses should all be taken from the cash flow statement

WACC = 8.0%
                                                                                   
** The entire worksheet needs to be completed on SBUX.  You cannot delete any lines but can add in more information if you believe it will help to better make your assessment.  You do not need to calculate any additional information on Dunkin Group.
 
Part II (15 points)

 
Byron Productions has sales in the most recent year of $650M, and EBIT of $250M.  The firm also had capital expenditures of $120M and depreciation expense of $90M.  Working capital needs are 9% of sales.  The firm expects sales, EBIT, capex, and depreciation to grow by 18% in Year 1 and 13% in Years 2 and 3.  Beginning in Year 4, the growth rate will drop to 5%, and the return on new invested capital will be 8.5% for the foreseeable future.  The firm is financed with $1.05B in debt and $1.05B in equity, the bondholders require an 7.5% return, and the stockholders require a 11% return.  The relevant tax rate is 34%.  The firm has $50M in excess cash, investments in other companyâ€s worth $125m and contingent liabilities of $150M.
 
 
 
Estimate the Enterprise and Equity Value using DCF analysis.  Use the continuing value formula on the bottom of page 41 in the book to calculate the terminal value.  If the stock is currently trading in the market at $15 per share, do you think it is undervalue, overvalued or fairly valued based on your DCF model of intrinsic value.  Assume 130M shares outstanding.       
 
 
 

[1] http://globalassets.starbucks.com/assets/233b9b746b384f8ca57882614f6cebdb.pdf

 

 
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