5 Required information [The following information applies to the questions displayed below.] Davidson Yachts is a small private company founded by two businesspeople who are friends and avid sailors. At present, they are interested in expanding the business and have asked you to review its financial statements. Davidson Yachts sells approximately 180 to 230 sailboats each year, ranging from 15-foot dinghies to 21-foot sailboats. Their sales prices range from $2,800 to more than $10,800. The company has a limited inventory of boats consisting primarily of one or two boats from each of the four manufacturers that supply Davidson. The company also sells a variety of supplies and parts and performs different types of service. Most sales are on credit. The company operates from a large building that has offices, storage, and sales space for some of the smaller sailboats. The larger sailboats are kept in a fenced area adjacent to the main building, and an ample parking area is nearby. This year, Davidson purchased a boat lift to haul boats. The lift has brought in revenues for boat repairs, hull painting, and related services, as well as the boat hauls. The balance sheet and income statement for Davidson Yachts for 2017 to 2022 follow. The increase in net fixed assets in the recent 2 years is due to improvements in the building, paving of the parking area, and the purchase of the lift. DAVIDSON YACHTS COMPANY Comparative Balance Sheet December 31 Cash Accounts receivable Allowance for bad debts Inventory Other current assets Total current assets Property and equipment Accumulated depreciation Total assets Accounts payable Taxes payable Short-term loans Accrued payroll payable Total current liabilities Long-term debt Equity (9,986) 2017 2018 2019 $ 24,060 $ 22,766 $ 19,535 2020 $ 29,226 2021 $ 44,492 2022 $32,064 100,265 103,714 113,863 105,188 144,809 (7,682) (13,306) 59,794 97,654 19,723 23,783 $285,004 (9,704) 35,809 12,694 $ 163,124 262,995 (66,784) 57,664 13,774 $ 187,932 282,808 (94,242) (9,224) 62,752 9,984 $ 196,910 300,180 (123,692) 126,703 (11,666) 68,924 12,046 $ 225,233 369,365 (158,899) $ 359,335 $ 83,435 $ 376,498 $ 79,007 $ 373,398 $ 435,699 $ 64,306 12,430 60,676 6,027 $ 162,568 158,973 37,794 Total liabilities and equity $ 359,335 11,783 57,780 5,398 $ 153,968 173,188 49,342 $ 376,498 12,580 38,383 4,449 $ 119,718 180,290 73,390 $ 373,398 $ 57,296 14,883 41,893 5,024 $ 119,096 215,797 100,806 $ 435,699 $ 221,515 406,069 (188,027) $ 439,557 $ 40,989 4,538 50,394 5,574 $ 101,495 230,271 107,791 $ 439,557 499,426 (228,107) $556,323 $51,424 16,932 77,762 6,079 $ 152,197 263,058 141,068 $ 556,323 DAVIDSON YACHTS COMPANY Comparative Statement of Income and Operating Cash Flow For the Years Ended December 31 2017 $ 771,580 39,179 476,308 $ 256,093 $ 29,155 18,677 2018 $ 728,878 36,445 443,698 $ 248,735 $ 27,538 19,637 73,744 2019 $ 781,480 41,134 460,415 $ 279,931 $ 29,530 21,078 2020 $ 933,478 46,798 548,178 $ 338,502 $ 35,287 21,555 2021 $ 768,610 33,687 456,069 $ 278,854 $ 29,208 2022 $952,857 48,180 532,997 $ 371,680 $ 40,160 29,073 101,527 5 Sales Returns and allowances Cost of sales Gross margin Depreciation expense Interest expense Salaries and wages Accounting and legal Administration expense. Other expense Total expense Net income Cash flow from operations (adjustments to net income) Depreciation Decrease (increase) in receivables Decrease (increase) in inventory Decrease (increase) in other current assets Increase (decrease) in current liabilities 24,969 82,003 77,926 95,844 92,983 9,704 9,986 9,403 11,914 13,188 11,460 79,746 12,710 75,314 19,007 80,773 96,549 88,075 97,521 15,843 22,983 19,014 22,742 $ 231,995 $ 225,226 $ 24,098 $ 23,509 $ 234,553 $ 45,378 $ 284,132 $ 267,437 302,483 $ 54,370 $ 11,417 $ 69,197 $ 27,538 (3,167) (21,855) $ 29,530 $ 35,287 (1,080) (8,600) (10,911) (5,088) 3,790 (34,250) $ 29,208 17,531 9,130 (7,677) (17,601) $ 16,345 $ 28,449 $ 70,403 (10,398) (6,172) (2,062) (622) $ 42,008 $ 40,160 |(33,997) (37,860) |(4,060) 50,702 $ 84,142 The company obtains its debt financing from two sources: (1) a small savings and loan for its short-term funds and (2) a larger commercial bank, also for short-term loans, but principally for long-term financing. The terms of the loan agreement with the bank include a restriction that Davidson's current ratio must remain higher than 1.5. Required: 1. What is the valuation of Davidson Yachts Company using the book value of equity method? 2. What is the valuation of Davidson Yachts Company using the multiples-based method on earnings? Assume the industry average earnings multiple is 7. Use the median value of the most recent 3 years for earnings. 3. What is the valuation of Davidson Yachts Company using the multiples-based method on operating cash flow? Assume the industry average multiple on operating cash flow is 5. Use the median value of the most recent 3 years for cash flow. Valuation Method 1. Net book value of equity 2. Earnings multiple 3. Operating cash flow multiple Valuation