Starbucks Investment Analysis, WACC and Portfolio Optimization

Abstract

This essay presents an integrated financial analysis through three distinct lenses: corporate finance, portfolio theory, and behavioral economics. First, a case study of Starbucks Corporation estimates its Weighted Average Cost of Capital (WACC) at 8.58% and demonstrates, through the evaluation of a recent acquisition, how strategic investments can create shareholder value by exceeding this hurdle rate. Second, employing quantitative portfolio analysis, we construct a minimum-variance portfolio for three hypothetical assets and recommend an optimal allocation for a risk-averse investor, highlighting the benefits of diversification. Finally, the paper critically examines the limitations of standard asset-pricing models by analyzing proposed U.S. legislation on capital gains exemptions for primary residences. We argue that real-world frictions—such as discrete policy changes, psychological biases like nominal loss aversion, and the consumption-hedging dual role of housing—create market dynamics that classical theories cannot fully explain. Collectively, this synthesis underscores the necessity of complementing quantitative models with insights from behavioral and institutional economics to achieve a more nuanced understanding of financial decision-making in practice.