Extra Credit Assignment, Econ 140 (3%) Choose any topic discussed in the managerial economics class and write a 3 – 5 page essay with the following specifications. 1. Typed – Double spaced 2. Font Size - 12 3. Margins – 1 inch (top, bottom, right and left) The paper should consist of the following: (a) A discussion on your selected topic covering the main points. (b) At least one news article related to the chosen topic, showing the application of the concept in the real world. You can easily find such news articles on google. (c) Write in your own words what you’ve understood from the article(s) and how this relates to what you have learned in the Econ 140 class. (d) Download (or scan) the articles and upload them along with your paper. The articles will not be included in the page count. Other Requirements: · Title of the paper and Your Name (Top corner of the first page) · References (These should be on the last page of the assignment) You can earn a maximum of 3% on this assignment. The grading TA’s decision regarding your assignment grade will be final; the assignment is not subject to grade-disputes. The assignments will be randomly distributed among the TAs for grading purpose. (Keep in mind that late submissions or submissions via email will not be graded.) 1 Front Page 2 Memo TO: FROM: DATE: SUBJECT: <text follows> 3 Table of contents Appendix 1: Pro Forma FCF Page 4 Appendix 2 : Weighted Average Cost of Capital Page 5 Appendix 3 : Balance Sheets Page 6 Appendix 4 : Income Statements Page 8 Appendix 5 : Statements of Cash Flows Page 10 Appendix 6 : 10K Data Collection Page 11 Appendix 7: Market Return and Beta Page 12 4 Pro Format FCF Value Drivers Sales Growth 4.07% Directly related to sales Operating Expens es (excluding depreciation) 89.86% Operating Current Assets 17.16% Operating Current Liabilities 14.31% Capital Expenditures 4.22% Not directly related to sales Depreciation Rate 6.09% Interest Rate on Debt 5.53% Interest Rate on ST Inves tments 1.73% <-- 1-year treasury yield (https://www.federalreserve.gov/releases/h15/) Tax Rate 36.34% Long term growth rate 0.00% Unlevered Free Cash Flows Jan-20 Jan-21 Jan-22 Jan-23 Jan-24 Jan-25 Jan-26 Jan-27 Jan-28 Jan-29 Sales $17,255,546 $17,958,617 $18,690,334 $19,451,865 $20,244,425 $21,069,276 $21,927,736 $22,821,174 $23,751,014 $24,718,741 Operating Expenses $15,506,519 $16,138,326 $16,795,877 $17,480,219 $18,192,444 $18,933,688 $19,705,135 $20,508,013 $21,343,605 $22,213,242 Depreciation $620,940 $665,274 $711,414 $759,435 $809,412 $861,425 $915,557 $971,895 $1,030,529 $1,091,552 Earnings Before Interest And Taxes $1,128,087 $1,155,017 $1,183,043 $1,212,212 $1,242,569 $1,274,163 $1,307,044 $1,341,265 $1,376,881 $1,413,947 Taxes $409,958 $419,745 $429,930 $440,530 $451,562 $463,044 $474,993 $487,429 $500,372 $513,842 Net Income $718,129 $735,272 $753,114 $771,682 $791,.

1. Extra Credit Assignment, Econ 140 (3%)
Choose any topic discussed in the managerial economics class
and write a 3 – 5 page essay with the following specifications.
1. Typed – Double spaced
2. Font Size - 12
3. Margins – 1 inch (top, bottom, right and left)
The paper should consist of the following:
(a) A discussion on your selected topic covering the main
points.
(b) At least one news article related to the chosen topic,
showing the application of the concept in the real world. You
can easily find such news articles on google.
(c) Write in your own words what you’ve understood from the
article(s) and how this relates to what you have learned in the
Econ 140 class.
(d) Download (or scan) the articles and upload them along with
your paper. The articles will not be included in the page count.
Other Requirements:
· Title of the paper and Your Name (Top corner of the first
page)
· References (These should be on the last page of the
assignment)
You can earn a maximum of 3% on this assignment. The grading
TA’s decision regarding your assignment grade will be final;
the assignment is not subject to grade-disputes. The assignments
will be randomly distributed among the TAs for grading
purpose.
(Keep in mind that late submissions or submissions via email
will not be graded.)

2. 1
Front Page
2
Memo
TO:
FROM:
DATE:
SUBJECT:
<text follows>
3
Table of contents

3. Appendix 1: Pro Forma FCF Page 4
Appendix 2 : Weighted Average Cost of Capital Page 5
Appendix 3 : Balance Sheets Page 6
Appendix 4 : Income Statements Page 8
Appendix 5 : Statements of Cash Flows Page 10
Appendix 6 : 10K Data Collection Page 11
Appendix 7: Market Return and Beta Page 12
4
Pro Format FCF
Value Drivers
Sales Growth 4.07%
Directly related to sales
Operating Expens es (excluding depreciation) 89.86%
Operating Current Assets 17.16%
Operating Current Liabilities 14.31%
Capital Expenditures 4.22%

4. Not directly related to sales
Depreciation Rate 6.09%
Interest Rate on Debt 5.53%
Interest Rate on ST Inves tments 1.73% <-- 1-year treasury
yield (https://www.federalreserve.gov/releases/h15/)
Tax Rate 36.34%
Long term growth rate 0.00%
Unlevered Free Cash Flows Jan-20 Jan-21 Jan-22 Jan-23 Jan-24
Jan-25 Jan-26 Jan-27 Jan-28 Jan-29
Sales $17,255,546 $17,958,617 $18,690,334 $19,451,865
$20,244,425 $21,069,276 $21,927,736 $22,821,174 $23,751,014
$24,718,741
Operating Expenses $15,506,519 $16,138,326 $16,795,877
$17,480,219 $18,192,444 $18,933,688 $19,705,135 $20,508,013
$21,343,605 $22,213,242
Depreciation $620,940 $665,274 $711,414 $759,435 $809,412
$861,425 $915,557 $971,895 $1,030,529 $1,091,552
Earnings Before Interest And Taxes $1,128,087 $1,155,017
$1,183,043 $1,212,212 $1,242,569 $1,274,163 $1,307,044
$1,341,265 $1,376,881 $1,413,947
Taxes $409,958 $419,745 $429,930 $440,530 $451,562
$463,044 $474,993 $487,429 $500,372 $513,842
Net Income $718,129 $735,272 $753,114 $771,682 $791,007
$811,120 $832,051 $853,836 $876,509 $900,105
Depreciation $620,940 $665,274 $711,414 $759,435 $809,412
$861,425 $915,557 $971,895 $1,030,529 $1,091,552

5. Capital Expenditures $727,890 $757,548 $788,414 $820,538
$853,970 $888,765 $924,977 $962,665 $1,001,888 $1,042,710
ONWC $491,595 $511,625 $532,471 $554,166 $576,745
$600,245 $624,701 $650,155 $676,645 $704,215
Change in ONWC -$216,405 $20,030 $20,846 $21,695 $22,579
$23,499 $24,457 $25,453 $26,490 $27,570
Free Cash Flows $827,584 $622,968 $655,268 $688,884
$723,869 $760,280 $798,175 $837,613 $878,659 $921,377
Terminal Value $16,207,764
PV of FCFs $15,011,177
Equity Value $15,131,177
Fair price per share $39.00
5
Weighted Average Cost of Capital
Gap WACC calculation
Debt Average value $1,292,833
Cost of debt 5.53%
Proportion of debt in capital s tructure 16.44%
Equity # Shares outs tanding 388,000 <----- Diluted

6. weighted-average number of shares from 10-K
Current price per share $16.94 <----- As of 11/3/2019
Market capitalization $6,572,720
Cost of equity 6.11%
Beta 0.68 <----- Beta calculated using 3 years data (se Returns
tab)
Rf 1.73%
Rm 8.21% <----- Annualized market return from Returns tab
Proportion of debt in capital s tructure 83.56%
WACC 5.68%
6
Balance Sheets
Gap Balance Sheets (in $1,000) (in $1,000)
PERIOD ENDING Jan-19 Jan-18 Jan-17 Jan-16 Jan-15 Jan-14
Assets
Current Assets
Cas h And Cash Equivalents 1,081,000 1,783,000 1,783,000
1,370,000 1,515,000 1,510,000
Short Term Investments 288,000 - - -

7. - -
Net Receivables 359,000 282,000 335,000 -
- -
Inventory 2,131,000 1,997,000 1,830,000 1,873,000
1,889,000 1,928,000
Other Current As sets 392,000 506,000 367,000
742,000 913,000 992,000
Total Current Assets 4,251,000 4,568,000 4,315,000
3,985,000 4,317,000 4,430,000
Long Term Investments - - -
Property Plant and Equipment 2,912,000 2,805,000
2,616,000 2,850,000 2,773,000 2,758,000
Goodwill 109,000 109,000 109,000
- - -
Intangible As sets 92,000 95,000 95,000
- - -
Other As sets 685,000 412,000 475,000
638,000 600,000 661,000
Total Assets 8,049,000 7,989,000 7,610,000
7,473,000 7,690,000 7,849,000
Liabilities
Current Liab ilities
Accounts Payable 1,126,000 1,181,000 1,243,000
2,114,000 2,213,000 2,420,000
Short/Current Long Term Debt - - 65,000
421,000 21,000 25,000
Other Current Liabilities 1,048,000 1,280,000
1,145,000 - - -
Total Current Liabilities 2,174,000 2,461,000

8. 2,453,000 2,535,000 2,234,000 2,445,000
Long Term Debt 1,249,000 1,249,000 1,248,000
1,310,000 1,332,000 1,369,000
Other Liabilities 1,073,000 1,135,000 1,005,000
1,083,000 1,141,000 973,000
Total Liabilities 4,496,000 4,845,000 4,706,000
4,928,000 4,707,000 4,787,000
Stockholders' Equity
Com mon Stock 19,000 19,000 20,000
20,000 21,000 55,000
Retained Earnings 3,481,000 3,089,000 2,830,000
2,440,000 2,797,000 14,218,000
Treasury Stock - -
- (14,245,000)
Capital Surplus - -
- 2,899,000
Other Stockholder Equity 53,000 36,000
54,000 85,000 165,000 135,000
Total Stockholder Equity 3,553,000 3,144,000
2,904,000 2,545,000 2,983,000 3,062,000
Total L&E 8,049,000 7,989,000 7,610,000 7,473,000
7,690,000 7,849,000
Total LT Debt 1,249,000 1,249,000 1,248,000 1,310,000
1,332,000 1,369,000
Average 1,292,833
Jan-20 Jan-19 Jan-18 Jan-17 Jan-16 Jan-15 Jan-14

9. Operating Current Assets 2,882,000 2,785,000 2,532,000
2,615,000 2,802,000 2,920,000 Average
% of Revenues 17.38% 17.57% 16.32% 16.55% 17.05% 18.08%
17.16%
Trend
17.89%
Operating Current Liabilities 2,174,000 2,461,000 2,388,000
2,114,000 2,213,000 2,420,000 Average
% of Revenues 13.11% 15.52% 15.39% 13.38% 13.47% 14.99%
14.31%
7
Balance Sheet Analysis
8
Income Statements
Gap Income statements (in $1,000)
PERIOD ENDING Jan-19 Jan-18 Jan-17 Jan-16 Jan-15 Jan-14

10. Total Revenue $16,580,000 $15,855,000 $15,516,000
$15,797,000 $16,435,000 $16,148,000
Cost of Revenue $10,258,000 $9,789,000 $9,876,000
$10,077,000 $10,146,000 $9,855,000
Gross Profit $6,322,000 $6,066,000 $5,640,000 $5,720,000
$6,289,000 $6,293,000
Selling General and Adm inis trative $4,960,000 $4,587,000
$4,449,000 $4,196,000 $4,206,000 $4,144,000
Operating Income or Loss $1,362,000 $1,479,000 $1,191,000
$1,524,000 $2,083,000 $2,149,000
Other Income/Expenses $33,000 $19,000 $8,000 $6,000 $5,000
$5,000
Earnings Before Interest And Taxes $1,395,000 $1,498,000
$1,199,000 $1,530,000 $2,088,000 $2,154,000
Interes t Expense $73,000 $74,000 $75,000 $59,000 $75,000
$61,000
Income Before Tax $1,322,000 $1,424,000 $1,124,000
$1,471,000 $2,013,000 $2,093,000
Incom e Tax Expens e $319,000 $576,000 $448,000 $551,000
$751,000 $813,000
Net Income $1,003,000 $848,000 $676,000 $920,000
$1,262,000 $1,280,000
Interest on Debt 5.84% 5.93% 5.86% 4.47% 5.55%
Average 5.53%
Tax Rate 24.13% 40.45% 39.86% 37.46% 37.31% 38.84%
Average 36.34%

11. Revenue Change YoY 4.57% 2.18% -1.78% -3.88% 1.78%
Trend (on % change) 4.07%
Operating Expenses (excluding depreciation)
Regression Ys $14,607,000 $13,858,000 $13,786,000
$13,740,000 $13,847,000 $13,524,000
Regression Xs $16,580,000 $15,855,000 $15,516,000
$15,797,000 $16,435,000 $16,148,000
Slope 51.73%
Intercept $5,587,662
R2 0.32 Too low value to accept Slope/Intercept as
valid value drivers
Operating Expenses (excluding depreciation) $14,607,000
$13,858,000 $13,786,000 $13,740,000 $13,847,000 $13,524,000
% of revenue 88.10% 87.40% 88.85% 86.98% 84.25% 83.75%
Average 86.56%
Trend 89.86%
9
Income Statement Analysis

12. 10
Statements of Cash Flows
Gap statements of Cash flows (i n $1,000)
PERIOD ENDING Jan-19 Jan-18 Jan-17 Jan-16 Jan-15 Jan-14
Net Income 1,003,000 848,000 676,000 920,000
1,262,000 1,280,000
Operating Activities, Cash Flows Provided By or Used In
Depreciation 578,000 499,000 531,000
527,000 500,000 470,000
Adjustm ents To Net Income 103,000 195,000
191,000 103,000 118,000 119,000
Changes In Accounts Receivables - -
- - - -
Changes In Liabilities (78,000) (53,000) 221,000
(83,000) 18,000 73,000
Changes In Inventories (154,000) (142,000) 46,000
(6,000) (9,000) (193,000)
Changes In Other Operating Activities (184,000) 33,000
54,000 133,000 240,000 (44,000)
Total Cash Flow From Operating Activities 1268000 1,380,000
1,719,000 1,594,000 2,129,000 1,705,000
Investing Activities, Cash Flows Provided By or Used In
Capital Expenditures (705,000) (731,000) (521,000)

13. (726,000) (714,000) (670,000)
Inves tm ents (287,000) - -
- - 50,000
Other Cash flows from Investing Activities (9,000)
63,000 (5,000) (4,000) 118,000
(4,000)
Total Cash Flows From Investing Activities -1001000
(668,000) (526,000) (730,000) (596,000)
(624,000)
Financing Activities, Cash Flows Provided By or Used In
Dividends Paid (373,000) (361,000) (367,000)
(377,000) (383,000) (321,000)
Sale Purchase of Stock - (285,000) 29,000
(950,000) (1,089,000) (882,000)
Net Borrowings - (67,000) (421,000)
379,000 (21,000) 144,000
Other Cash Flows from Financing Activities (1,000)
(18,000) (18,000) (70,000) (52,000)
55,000
Total Cash Flows From Financing Activities (374,000)
(731,000) (777,000) (1,018,000) (1,545,000)
(1,004,000)
Effect Of Exchange Rate Changes (10,000) 19,000
16,000 (19,000) (21,000) (36,000)
Change In Cash and Cash Equivalents (107,000) (19,000)
416,000 (154,000) (12,000) 41,000
Capital Expenditures 4.25% 4.61% 3.36% 4.60% 4.34% 4.15%
Average 4.22%
Dividends Paid 37.19% 42.57% 54.29% 40.98% 30.35% 25.08%

14. Average 38.41%
11
10K Data Collection
Gap 2014 10K - Note 2. Additional Financial Statement
Information (p. 48)
Gap 2015 10K - Note 2. Additional Financial Statement
Information (p. 47)
Gap 2019 10K - Note 2. Additional Financial Statement
Information (p.51)
Gap 2018 10K - Note 2. Additional Financial Statement
Information (p.51)
Property and Equipment
Property and equipment are stated at cost less accumulated
depreciation and consist of the following:
($ in m illions ) January 30, January 30, January 30, January 30,
January 31, Januar y 31,
2018 2018 2017 2016 2015 2014
Leasehold improvements 3,104 3,140 3,099 3,252 3,220 3,211
Furniture and equipment 2,732 2,623 2,508 2,603 2,560 2,793
Software 1,525 1,703 1,600 1,433 1,349 1,173

15. Land, buildings, and building improvements 1,123 1,037 1,000
1,019 1,009 1,106
Construction-in-progress 183 264 222 187 167 176
Property and equipment, at cost 8,667 8,767 8,429 8,494 8,305
8,305
Depreciation rate 6.67% 5.69% 6.30% 6.20% 6.02% 5.66%
Average useful life (years) 16.4
Page 40Page 40
12
Time Series of T-Bills, S&P500, and Gap Inc.
T-Bills S&P500 Gap Inc.
Mean 0.22% 0.68% 1.25%
Median 0.20% 1.07% 0.58%
St. Dev. 0.0019 0.0411 0.1114