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Gap Inc.

Gap Inc. The Valuation Project -Mod 7 : Residual Enterprise Income Model Sherry Xu ( netID : jxu6). Table of Contents. 1. Company profile 2. Valuation using Residual Enterprise Income Model 2.1 Recap of DCF and REI model 2.2 Calculation of WACC (Mod 6) 2.3 Valuation using REI model

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Gap Inc.

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  1. GapInc. TheValuationProject-Mod7:Residual Enterprise Income Model SherryXu(netID:jxu6)

  2. Table of Contents • 1. Company profile • 2. Valuation using Residual Enterprise Income Model • 2.1 Recap of DCF and REI model • 2.2 Calculation of WACC (Mod 6) • 2.3 Valuation using REI model • 2.4 Valuation using DCF model • 2.5 Comparing the two models • 2.6 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 and REI model DCF model

  5. 2.1 Recap of DCF and 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 Calculation of WACC (rEnt)-Mod 6

  7. 2.2 Valuation using REI model

  8. 2.2 Valuation using REI model

  9. 2.3 Valuation using DCF model • The estimated enterprise value using REI model is the same as the value using DCF model.

  10. 2.4 Comparing the two models • About half (48%) of the total estimated enterprise value is captured within the short horizon • More accurate

  11. 2.4 Comparing the two models • Over half (71%) of the estimated enterprise value comes from continuing value (beyond the horizon) • More uncertainty

  12. 2.5 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

  13. Questions?

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

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