Brooks Plumbing Products Incorporated (BPP) manufactures plumbing fixtures and other home improvement products that are sold in Home Depot and Walmart as well as hardware stores. BPP has a solid reputation for providing value products, good quality, and a good price. The company has been approached by an investment banking firm representing a third company, Garden Specialties Incorporated (GSI), that is interested in acquiring BPP. The acquiring firm (GSI) is a retailer of garden supplies; it sees the potential synergies of the combined firm and is willing to pay BPP shareholders $40 cash per share for their stock, which is greater than the current stock price; the stock has traded at about $34 in recent months. Summary financial information about BPP follows

3. What are the valuations of BPP (for 2022) using the multiples-based methods for sales, earnings, and free cash flow?

4. What is the estimated value for BPP using the discounted free cash flow method, assuming that the 2022 amount of free cash flow continues indefinitely?

BROOKS PLUMBING PRODUCTS INCORPORATED Selected Financial Information For the Years Ended December 31 2022 Industry Average 2021 $ 3,536,227 87,382,771 59,971,645 143,858,377 95,967,302 188,545,338 67,415,209 121,083, 274 37,973,302 87,721,369 13,070,336 639,576,465 477,891,001 134,845, 229 38% 15,744,254 1,330,000 $ 23.79 23,563,554 38% 2022 Cash $ 79,999,778 Accounts receivable 56,858,465 Inventory 39,745, 416 Long-lived assets Gross book value 167,358,377 Net book value 100, 700, 809 Replacement cost 170,667,409 Liquidation value 68,814,002 Current liabilities 119,125,766 Long-term debt 32,077,364 Shareholders' equity 126,021,338 Capital expenditures 23,580,000 Sales 668,334,771 Cost of sales 499,057,788 Operating expense* 102,747,355 Income tax rate Depreciation expense 18,846,493 Dividends 2,830,000 Year-end stock price $36.58 Number of outstanding shares 26,489,554 Sales multiplier Free cash flow multiplier Earnings multiplier Cost of capital 6.0% Accounts receivable turnover Inventory turnover Current ratio Quick ratio Cash flow ratio Free cash flow ratio Gross margin percentage Return on assets (net book value) Return on equity Earnings per share *Operating expense includes depreciation expense. 38.00% 1.40 8.70 13.80 6.0% 6.30 8.50 1.90 1.10 1.40 1.10 34.0% 20.0% 30.0% $ 2.34 Answer is complete but not entirely correct. 1. 2. 3. Market value of equity method Book value of equity method Multiples-based method - Sales Multiples-based method - Earnings Multiples-based method - Free cash flow Discounted cash flow method Which of the methods would you use? Is the GSI offer a good one? $ 968,987,885 $ 126,021,338 $ 935,668,679 $ 0 X $ 0 $ 0 Market value of equity method Yes 4. 5. 6