Stock traded on NASDAQ under the ticker SBUX

      You are going to estimate the weighted average cost of capital (WACC) at the end of fiscal year 2022 for the following companies: 1) Starbucks.com, Inc. Stock traded on NASDAQ under the ticker SBUX. 2) Shake Shack Inc. Stock traded on NYSE under the ticker SHAK. Use the EDGAR database on the SEC website1 to locate the most recent annual reports of these companies. Search by company name and pick the right entity in the search results. SEC assigns a unique CIK number (as an identifier) to each company. The CIKs for Starbucks and Shake Shack are 0000829224 and 0001620533, respectively. In the list of filings for each company, access the most recent annual report, 10-K. Starbucks and Shake Shack filed these on 11/18/22 and 02/23/23. Question 1. Based on the annual reports, on what day did the fiscal year 2022 end for each company? Use Yahoo! Finance (finance.yahoo.com) to download stock prices of Starbucks and Shake Shack. On the Yahoo Finance page of each company, select the tab “Historical Data.” The time period should be at least 5 years up to the end of the fiscal year 2022 of each company (identified in Q1). Select 1 https://www.sec.gov/edgar/searchedgar/companysearch.html 2 “historical prices” and set the frequency equal to “monthly.” Press the “Apply” button. Once the page is refreshed, click the “download data” link. Using the “adjusted close” prices, for each company, calculate the 60 monthly returns up to the end of the fiscal year 2022. Hint. If the adjusted close price is equal to $100 on 9/1/2022 and $110 on 10/1/2022, then the stock return in that month equals: 110/100 − 1 = 0.1 = 10%. Suggestion. Organize your spreadsheet in the following way. The first column should contain dates. The subsequent columns should contain adjusted stock prices, returns (computed from prices), etc. The secret of solving the project fast is in keeping the spreadsheet neat and clean. Note. Compare prices reported in the monthly viewer with prices reported in the daily viewer to notice that the monthly viewer reports prices at the end of each month. Question 2. What is the arithmetic average monthly stock return for each company during the 60-month period prior to the end of fiscal year 2022? (Note: the average should be computed over 60 monthly returns.) What about the geometric average return? Which stock has been a better investment if one cares only about the return (and not about the risk)? (Hint: Please keep in mind that the fiscal years may end on different days for each company. As such, the 60-month period for the return calculation may not be identical for the two stocks.) Question 3. What is the standard deviation of monthly stock returns for each company in the same time period as in Question 2? Standard deviation of stock returns is a measure of volatility. The returns on which stock have been more volatile in the time period under consideration? Question 4. Standard deviation of stock returns may be referred to as a measure of risk. There are two types of risks: idiosyncratic and systemic. What type of risk is captured by the standard deviation: idiosyncratic, systematic, both, or neither? In Q2, you compared the two stocks based on the average realized return, without taking risk into consideration. The Sharpe Ratio is a measure for calculating risk-adjusted return. It is equal to the ratio of the excess return’s average (or expected) value and its standard deviation. We will calculate a simplified version of the Sharpe Ratio. Question 5. For each stock, divide the arithmetic average monthly return (from Q2) by the standard deviation of monthly returns (from Q3). (In other words, at this point we are not calculating the excess return by subtracting the risk-free rate.) This is the (simplified) Sharpe Ratio. Which stock has been a better investment based on the (simplified) Sharpe Ratio comparison?