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Gap Inc.

Gap Inc. The Valuation Project -Mod 2 : Introduction to Reformulation Sherry Xu ( netID : jxu6). Table of Contents. Original Financial Statements Consolidated Balance Sheets Consolidated Statements of Income Consolidated Statements of Comprehensive Income

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Gap Inc.

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  1. GapInc. TheValuationProject-Mod2:Introduction to Reformulation SherryXu(netID:jxu6)

  2. Table of Contents • Original Financial Statements • Consolidated Balance Sheets • Consolidated Statements of Income • Consolidated Statements of Comprehensive Income • Reformulated Financial Statements, Assumptions and Unanswered Questions • NEA • NFL • EPAT • FEAT

  3. 1.1 Original Financial Statements

  4. 1.1 Original Financial Statements

  5. 1.1 Original Financial Statements

  6. 1.1 Original Financial Statements

  7. 1.1 Original Financial Statements

  8. 1.2 Reformulated Financial Statements, Assumptions and Unanswered Questions • Whatamountof thesehighlighteditems shouldbeallocated to enterprise activities?

  9. 1.2 Reformulated Financial Statements, Assumptions and Unanswered Questions • How much cash should be allocated to enterprise activities? • Sinceoperating cash is required to ensure sales will be uninterrupted by inability to payforinputsasneeded,salesrevenueisoftenconsideredabasisfordeterminingneedofcash. • Assumption:2%ofnetsales • Cash and cash equivalents • Note 1. Organization and Summary of Significant Accounting Policies • Cash and Cash Equivalents and Short-Term Investments • Cash includes funds deposited in banks as well as amounts in transit from banks for customer credit card and debit card transactions that process in less than seven days. The majority of these amounts are processed within five business days. • All highly liquid investments with original maturities of 91 days or less are classified as cash equivalents. Highly liquid investments with original maturities of greater than 91 days that will mature less than one year from the balance sheet date are classified as short-term investments. Our cash equivalents and short-term investments are placed primarily in money market funds, time deposits, and commercial paper and are classified as held-to-maturity based on our positive intent and ability to hold the securities to maturity. We value these investments at their original purchase prices plus interest that has accrued at the stated rate. Income related to these securities is recorded in interest income in the Consolidated Statements of Income.

  10. 1.2 Reformulated Financial Statements, Assumptions and Unanswered Questions • How much cash should be allocated to enterprise activities? • Cash and cash equivalents • Note 2. Additional Financial Statement Information • Cash and Cash Equivalents and Short-Term Investments

  11. 1.2 Reformulated Financial Statements, Assumptions and Unanswered Questions • Cash and cash equivalents • Note 6. Credit Facilities • $500 million, five-year, unsecured revolving credit facility • Scheduled to expire in April 2016 • Available for general corporate purposes including working capital, trade letters of credit, and standby letters of credit • Assumption:Cash needed for enterprise activities is estimated to be ~$300m (2% of net sales). • With this $500m revolving credit facility, the company would not need to set aside any cash. • However, “as of February 2, 2013, there were no borrowings under the Facility.” • Therefore,IassumethecompanywouldnotrelyheavilyontheFacilityandallocate~$300mforthecashforenterpriseactivities.

  12. 1.2 Reformulated Financial Statements, Assumptions and Unanswered Questions • Note 2. Additional Financial Statement Information • Other Current Assets

  13. 1.2 Reformulated Financial Statements, Assumptions and Unanswered Questions • Note 2. Additional Financial Statement Information • Other Long-Term Assets

  14. 1.2 Reformulated Financial Statements, Assumptions and Unanswered Questions • Whatamountof thesehighlighteditems shouldbe allocated to enterprise activities?

  15. 1.2 Reformulated Financial Statements, Assumptions and Unanswered Questions • Note 2. Additional Financial Statement Information • Accrued Expenses and Other Current Liabilities

  16. 1.2 Reformulated Financial Statements, Assumptions and Unanswered Questions

  17. 1.2 Reformulated Financial Statements, Assumptions and Unanswered Questions • Note 2. Additional Financial Statement Information • Lease Incentives and Other Long-Term Liabilities

  18. 1.2 Reformulated Financial Statements, Assumptions and Unanswered Questions • CHECK!

  19. 1.2 Reformulated Financial Statements, Assumptions and Unanswered Questions • Incometaxallocatedtocont.enterpriseoperations=(Interestexpense-interestincome)*marginaltaxrate+incometaxoncont.operations • What is the marginal tax rate? • Assumption:37%

  20. 1.2 Reformulated Financial Statements, Assumptions and Unanswered Questions • Derivativefinancialinstruments:Howmuchshouldbeallocatedtoenterpriseactivities?

  21. 1.2 Reformulated Financial Statements, Assumptions and Unanswered Questions • Assumption:enterprise activities • Note 8. Derivative Financial Instruments • We operate in foreign countries, which exposes us to market risk associated with foreign currency exchange rate fluctuations. Our risk management policy is to hedge a portion of our transactions related to merchandise purchases for foreign operations and certain intercompany transactions using foreign exchange forward contracts. • We do not enter into derivative financial contracts for trading purposes.

  22. 1.2 Reformulated Financial Statements, Assumptions and Unanswered Questions • Assumption:enterprise activities • Note 8. Derivative Financial Instruments • Cash Flow Hedges • Hedge forecasted merchandise purchases and related costs • Hedge forecasted intercompany royalty payments • Hedge forecasted intercompany revenue transactions related to merchandise sold • Treasury rate lock agreements for5.95 percent fixed-rate notes of $1.25 billion in April 2011 • Net Investment Hedges • Hedge the net assets of international subsidiaries to offset the foreign currency translation and economic exposures related to our investment in the subsidiaries • Other Derivatives Not Designated as Hedging Instruments • Hedge market risk exposure associated with foreign currency exchange rate fluctuations for certain intercompany balances

  23. 1.2 Reformulated Financial Statements, Assumptions and Unanswered Questions

  24. 1.2 Reformulated Financial Statements, Assumptions and Unanswered Questions • CHECK!

  25. Questions?

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

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