Cost of Capital

Key Assumptions

1. The long-term debt includes Leases and Current Portion of debt which can be found on the balance sheet.

2. The weight of equity used the market value of equity was calculated by using outstanding shares found on the value line report and the stock price as of March 22, 2024

3. The pre-tax cost of debt was sourced from FactSet. Specifically, it was obtained from the FactSet Overview section, within the Snapshot tab, by navigating to the WACC section.

4. The cost of equity for Gap Inc. was calculated using the Capital Asset Pricing Model (CAPM), where the required rate of return is equal to the risk-free rate plus the product of the market risk premium and beta.

• The risk-free rate was assumed to be equal to the Mid Yield reported by FactSet for 10-year Treasuries on the calculation date.

• The market risk premium was assumed to be equal to the average market risk premium used in the U.S., as reported by Fernandez et al. (2024).

• Estimated betas for Gap Inc. were obtained from Value Line, FactSet, and S&P Capital IQ. The CAPM required return and subsequently WACC were calculated with each of these betas. While all the betas were relatively close, the one from Value Line was an exception. However, as the Value Line report may be slightly outdated, it might not reflect the current market beta as accurately as FactSet and S&P Capital IQ, which constantly update their beta values.