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Gap Inc.

Gap Inc. The Valuation Project -Mod 8 : Abnormal Enterprise Income Growth Model Sherry Xu ( netID : jxu6). Table of Contents. 1. Company profile 2. Valuation using Abnormal Enterprise Income Growth Model 2.1 Recap of DCF, REI and AEIG model 2.2 Calculation of WACC (Mod 6)

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Gap Inc.

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  1. GapInc. TheValuationProject-Mod8:Abnormal Enterprise Income Growth Model SherryXu(netID:jxu6)

  2. Table of Contents • 1. Company profile • 2. Valuation using Abnormal Enterprise Income Growth Model • 2.1 Recap of DCF, REI and AEIG model • 2.2 Calculation of WACC (Mod 6) • 2.3 Valuation using AEIG model • 2.4 Valuation using DCF model • 2.5 Valuation using REI model • 2.6 Comparing the three models • 2.7 Issues going forward

  3. 1. Companyprofile Industry:Apparelstores Global retailer offering apparel, accessories, and personal care products for men, women, children, and babies Comparablecompanies:Abercrombie(ANF),AmericanEagle(AEO),Aeropostle(ARO) Foundedin1969inSanFrancisco;incorporatedinDelaware Brands:Gap, Old Navy, Banana Republic, Piperlime, Athleta, and Intermix #ofcompany-operatedstores: 3,095; # of franchise stores: 312 (As of FY2012 balance sheet date)

  4. 2.1 Recap of DCF model DCF model

  5. 2.1 Recap of REI model REI model Beginning NEA*cost of capital: amount of earnings expected given the NEA theoretically expected earnings Residual enterprise income: premium of market value over book value (V0 – NEA0)

  6. 2.1 Recap of AEIG model AEIG model Abnormal enterprise income growth explains the premium of market value over capitalized EPAT:

  7. 2.2 Calculation of WACC (rEnt)-Mod 6

  8. 2.3 Valuation using AEIG model

  9. 2.3 Valuation using AEIG model

  10. 2.4 Valuation using DCF model

  11. 2.5 Valuation using REI model

  12. 2.6 Comparing the two models • The three valuation models generate the same estimated enterprise value. • We would prefer to have a shorter horizon: The farther we forecast into the future, the less confidence we have in our estimates. How much of the estimated value is captured within the forecasting horizon. • Assuming constant “g” at this point steady state • AEIG model shows the lowest reliance on the continuing value.

  13. 2.7 Issues going forward • Refine parsimonious forecasts • Constant sales growth rate? • EPMEPAT • EATONEA • Need to forecast out additional years beyond FY2018 if estimated growth rate is not constant (need to achieve steady state)

  14. Questions?

  15. Thank you! Sherry Xu (netID: jxu6)

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