Corp FIn GAp
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Established in 1969, GAP Inc. is the largest specialty retailer in USA. Exhibit 1 gives thedetails of its stores across the globe. As a Company, GAP has always been seen as a brandtargeted at young crowd for their casual wear needs and its most famous brands are Old Navyand Banana Republic. GAP has been trying to carve out its space in luxury retail market andit took its first steps when it acquired Intermix in December 2012 for USD 130 mn(http://online.wsj.com/news/articles/SB10001424127887323689604578218041584954854).To take a step further in the same direction, GAP is considering an expansion into luxurywear by manufacturing high end apparels as a “Private Label”. Traditionally, majority of itsmanufacturing is done outside USA and is outsourced as cost becomes a huge differential butbecause this would be its landmark entry into a different segment, it has decided to keep themanufacturing with itself. You have been asked to assess the project and come back with yourrecommendations as you run the show at HQ of GAP.You did your research and have come back with the following information: Setting up own manufacturing facility would require acquisition of land and all otherkey machinery for the business. You would get the ball rolling by an initialinvestment of $ 2 bn. After 1 year of initial investment, there will be an additionalinvestment of $ 1 bn and it would be followed by an investment of $ 0.5 bn thefollowing year. The business would be up and running at the beginning of the thirdyear. Out of the total investment, $ 2,5 bn would be depreciated using a doubledeclining balance depreciation over a period of 10 years (Switch to straight line whenit provides a higher depreciation and then stay with straight line) You had asked your team to carry out a market research to gauge the potential of thebusiness and see if customers would be able to relate to GAP promoting a luxurybrand. To complete the same, your team has already incurred and expensed cost of $200 mn and has come to you with details about the potential marke
Transcript of Corp FIn GAp
AssumptionsInvestmentYr012Invst(billion)210.5Year of Completion3Yr 3 onwardsDepreciation Amount(Bil)2.5
Market Survey Cost (Initial Cost Mil)200Yr01234567891011121314Market Size72.0076.3280.9085.7590.9096.35102.13108.26114.76121.64128.94136.68144.88153.57162.79Growth6%
Market Share GAPYr 345678910111213142%2.5%3.0%3.5%4.0%4.5%5.0%5.0%Increase0.50%0.50%0.50%0.50%0.50%0.50%StableSales1.722.272.893.574.335.166.086.456.837.247.688.14EBITDA Margin30%
S&GACurrent3bilGrowth for 12 yrs5%p.aAllocation10%of total
Gen and AdminYr 3 100milAs a % of Rev6%
Yr01234567891011121314S and GA33.153.313.473.653.834.024.224.434.654.895.135.395.395.39Allocated for New SGA0.350.360.380.400.420.440.470.490.510.540.540.54G and A0.100.130.170.210.250.300.350.380.400.420.450.47Total Allocated Cost0.450.500.550.610.670.740.820.860.910.960.991.01Distr Capacity Util70%Increase every year3.50%New Business8%of Total CapacityCapacity Expansion cost1(yr 3)Inflation2%DDB Depreciation20yrsAdvertising ExpCurrent1bnIncr5%12 yrsYr 3 onwards10%addnl exp
Yr01234567891011121314Expense1.001.051.101.161.221.281.341.411.481.551.631.711.801.891.98Addnl Advert0.120.120.130.130.140.150.160.160.170.180.190.20Total Advert1.001.051.101.271.341.401.471.551.631.711.791.881.982.072.18
WC DetailsA/C Receivable5%RevenueInv20%COGSCredit Offered8%COGSBeta1.04RatingBBB-Default Spread1.65%
Stk Price39.9Shares Out446MilCapital StructureDebt1394MilMaturity6yrsInterest61MilTAX RATEEffective38.80%Marginal40%
US Govt Bond Rate2.5%Expected Inflation2%
Lease Obligation2014110520151087201691520177382018586Thereafter1716Total Minimum6147working capitalyears0123456789101112131415Accounts recivables0000.0857531520.11362292640.14452836240.17873340810.21652275730.25820338810.30410621260.32235258540.34169374050.36219536490.38392708680.406962712Inventory0000.08945750.0994303750.11028489380.12209129840.13492510380.14886747760.16400564860.17291519060.18231276520.19222532750.19729376440.2026663075Payables0000.0357830.039772150.04411395750.04883651940.05397004150.0595469910.06560225940.06916607620.07292510610.0768901310.07891750580.081066523Working capital0000.1394276520.17328115140.21069929860.25198818720.29747781960.34752387460.40250960180.42610169970.45108139960.47753056140.50230334550.5285624965Growth rate in steady state3%RF2.5%Beta1.04Rm9.05%A.Damodaran India Equity Risk Premium Cost of Equity11.91%Cost of Debt4.1500%Equity Market value17795.4mnDebt value1394mnD/E0.0726442724WACC11.35%
Depreciation
012345678910STRAIGHT LINE10%11%13%14%17%20%25%33%50%100%DOUBLE DECLINING20%
INVESTMENT2000500BOOK VALUE:BEG20001600168013441075.2860.16688.128516.096344.064172.032DEPRECIABLE BV20002100168013441075.2860.16688.128516.096344.064172.032DDB DEPRECIATION400420336268.8215.04172.032137.6256103.219268.812834.4064STL DEPRECIATION200233.3333333333210192179.2172.032172.032172.032172.032172.032DEPRECIATION USED400420336268.8215.04172.032172.032172.032172.032172.032NET BOOK VALUE1600168013441075.2860.16688.128516.096344.064172.0320
DISTRIBUTION CAPACITY70.0%73.5%77.0%88.500%92.0%95.5%99.0%100.0%
INVESTMENT REQUIRED100010201040.41061.2081082.432161104.08080321126.1624192641148.6856676493
TIME LINE FOR DEPRECIATION01234567891011121314151617181920
DOUBLE DEPRECIATION 114.87 103.38 93.04 83.74 75.37 67.83 61.05 54.94 49.45 44.50 40.05 36.05 32.44 29.20 26.28 23.65 21.29 19.16 17.24 15.52
TIME PERIOD0123456789101112131415161718192021222324252627FINAL DEPRECIATION In Bil0.400.420.340.270.220.170.170.290.280.270.080.080.070.060.050.050.040.040.040.030.030.030.020.020.020.020.02
Accounting ReturnsYear01234567891011121314Revenue0001.722.272.893.574.335.166.086.456.837.247.688.14EBITDA0.00.00.00.510.680.871.071.301.551.821.932.052.172.302.44Depreciation00.400.420.340.270.220.170.170.290.280.270.080.080.070.06Allocated Cost00.00.00.450.500.550.610.670.740.820.860.910.960.991.01Advertising Expense0.00.00.00.120.120.130.130.140.150.160.160.170.180.190.20Operating Income(EBIT)0.0-0.40-0.42-0.38-0.21-0.030.160.310.370.570.640.880.961.061.17Interest Expense0.0610.0610.0610.0610.0610.061000000000PBT-0.06-0.46-0.48-0.45-0.27-0.090.160.310.370.570.640.880.961.061.17TAX-0.020.00.00.00.00.00.060.120.140.220.250.340.370.410.45PAT-0.04-0.46-0.48-0.45-0.27-0.090.100.190.230.350.390.540.590.650.72
Capital Invested210.51Total Capital Invested233.53.53.53.53.53.54.54.54.54.54.54.54.5Return on Capital-1.9%-15.4%-13.7%-12.7%-7.6%-2.5%2.7%5.5%5.0%7.8%8.7%12.0%13.0%14.4%15.9%
Cash Flow Analysisworking capitalAccounts recivables0000.0857531520.11362292640.14452836240.17873340810.21652275730.25820338810.30410621260.32235258540.34169374050.36219536490.38392708680.406962712InventoryPayablesWorking capital0
Year01234567891011121314Net Income-0.04-0.46-0.48-0.45-0.27-0.090.100.190.230.350.390.540.590.650.72Depriciation0.000.400.420.340.270.220.170.170.290.280.270.080.080.070.06Capex210.51Change in WC000.1394276520.03385349940.03741814720.04128888860.04548963230.05004605510.05498572710.02359209790.02497969990.02644916180.0247727840.0262591511Salvage Value0CFE-2.04-1.06-0.56-0.25-0.030.090.230.32-0.540.570.630.600.630.690.75NPV($2.17)IRR
Years0123456789101112131415Net Income-0.04-0.46-0.48-0.45-0.27-0.090.100.190.230.350.390.540.590.650.720.7371465827Depriciation0.000.400.420.340.270.220.170.170.290.280.270.080.080.070.060.06Capex210.51Change in WC000.1394276520.03385349940.03741814720.04128888860.04548963230.05004605510.05498572710.02359209790.02497969990.02644916180.0247727840.02625915110.0262591511Salvage Value0CFE-2.04-1.06-0.56-0.25-0.030.090.230.32-0.540.570.630.600.630.690.750.77Terminal Value9.25CFE-2.04-1.06-0.56-0.25-0.030.090.230.32-0.540.570.630.600.630.6910.00NPV($0.33)IRR
