The Gap - The Gap, Inc. Valuation Analysis The Gap, Inc....

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The Gap, Inc. Valuation Analysis The Gap, Inc. (Gap) is a specialty clothing retailer with locations throughout the world. The objective of our analysis is to see if the company is fairly valued in the marketplace. Our analysis will cover several possible scenarios. We will examine several different variables including growth rates, return on equity and cost of capital and their impact on the firm’s valuation. We will analyze the prospects for Gap for the next five years. In order to conduct our analysis and examination we will rely on some historical data and averages. This data unless otherwise indicated was found on www.reuters.com . We will first examine the impact on Gap’s valuation if they continue on their current trend based on the five year averages for earnings per share growth of 15.03% and return on equity, of 20.66%. We rely on the performance of the past 5 years because it is a good indicator of the direction of the firm. The majority of the management has been in place during that period. The economy has performed within its normal range and the conditions of the retailing environment have been fairly consistent. At the conclusion of the five year period the growth rate would be reduced to 5% and return on equity would be reduced to 15%. Since it is difficult to predict with great accuracy what the performance of the company would be after five years we felt these conservative estimates would be appropriate. In our valuation model we utilized an equity cost of capital of 8%. This is based on a beta for Gap of 1; this information was obtained on Reuters and confirmed on several additional financial websites. We also utilized a risk free rate of 2.5% based on the current yield on the 5 year Treasury note. We felt this was appropriate because it matched the time frame in our analysis. Finally in our cost of
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This note was uploaded on 06/22/2008 for the course ACCT 824 taught by Professor Cataldo during the Spring '08 term at Suffolk.

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The Gap - The Gap, Inc. Valuation Analysis The Gap, Inc....

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