Check my Required information (The following information applies to the questions displayed below.] Davidson Yachts is a small 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 220 to 270 sailboats each year, ranging from 15-foot dinghies to 21-foot sailboats. Their sales prices range from $3,300 to more than $11,300. 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 2014-2019 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. con 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 Total liabilities and equity DAVIDSON YACHTS COMPANY Comparative Balance Sheet December 31 2014 2015 2016 $ 24,560 $ 23,266 $ 20,035 100,765 104,264 114,463 (9,954) (10,736) (9,474) 36,309 58,214 63,352 13,194 14,324 10,584 $164,874 $189,332 $ 198,960 263,495 283,308 300,680 (67,284) (94,742) (124,192) $361,085 $377,898 $ 375,448 $ 83,935 $ 79,557 $ 64,906 12,930 12,283 13,080 61,176 58,280 38,883 6,527 5,898 4,949 $164,568 $156,018 $ 121,818 159,473 173,688 180,790 37,044 48,192 72,840 $361,085 $377,898 $ 375,448 2017 $ 29,726 127,353 (11,916) 69,574 12,696 $ 227,433 369,865 (159, 399) $ 437,899 $ 57,946 15,383 42,393 5,524 $ 121,246 216, 297 100, 356 $ 437,899 2018 $ 44,992 105, 688 (7,932) 60, 294 20, 223 $ 223, 265 406,569 (188,527) $ 441,307 $ 41,489 5,038 50,894 6,074 $ 103,495 230, 771 107,041 $ 441,307 2019 $ 32,564 145, 309 (13,806) 98,204 24,333 $ 286,604 499,926 (228,607) $ 557,923 $ 51, 974 17,432 78,262 6,579 $ 154,247 263,558 140, 118 $ 557,923 DAVIDSON YACHTS COMPANY Comparative Statement of Income and Operating Cash Flow For the Years Ended December 31 2014 2015 2016 2017 2017 2018 2019 Sales $ 774,080 $ 731,378 $ 783,980 $935, 978 771,110 955,357 Returns and allowances 39,679 36,945 41,634 47,298 34,187 48,680 Cost of sales 477,808 445,198 461,915549, 678457,569 534,497 Gross margin $256,593 $249,235 $280,431 $339,002 $279,354 $372,180 Depreciation expense $ 29,205 $ 27,588 $ 29,580 $ 35,337 $ 29,258 $ 40,210 Interest expense 18,727 19,687 21, 128 21,605 25,01929,123 Salaries and wages 82,053 73,794 77,976 95,894 93,033 101,577 Accounting and legal 9,954 10,736 9,453 11,964 13,238 1 1,510 Administration expense 79,796 75,364 80,823 96,59988, 12597,571 Other expense 12,760 19,057 15,893 23,033 19,064 22,792 Total expense $ 232,495 $226,226 $234,853 $284,432 $267,737 $302, 783 Net income $ 24,098 $ 23,009 $ 45,578 $ 54,570 $ 11,617 $ 69,397 Cash flow from operations (adjustments to net income) Depreciation $ 27,588 $ 29,580 $ 35,337 $ 29,258 $ 40,210 Decrease (increase) in receivables (2,717) (11,461) (10,448) 17,681 (33, 747) Decrease (increase) in inventory (21,905) (5,138) (6,222) 9,280 (37,910) Decrease (increase) in other current assets (1,130) 3,740 (2,112) (7,527) (4,110) Increase (decrease) in current liabilities (8,550) (34,200)_ (572) (17,751) 50,752 $ 16,295 $ 28,099 $ 70,553 $ 42,558 $ 84,592 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 1. 2. 3. Valuation Method Net book value of equity Earnings multiple Operating cash flow multiple Check my Required information (The following information applies to the questions displayed below.] Davidson Yachts is a small 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 220 to 270 sailboats each year, ranging from 15-foot dinghies to 21-foot sailboats. Their sales prices range from $3,300 to more than $11,300. 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 2014-2019 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. con 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 Total liabilities and equity DAVIDSON YACHTS COMPANY Comparative Balance Sheet December 31 2014 2015 2016 $ 24,560 $ 23,266 $ 20,035 100,765 104,264 114,463 (9,954) (10,736) (9,474) 36,309 58,214 63,352 13,194 14,324 10,584 $164,874 $189,332 $ 198,960 263,495 283,308 300,680 (67,284) (94,742) (124,192) $361,085 $377,898 $ 375,448 $ 83,935 $ 79,557 $ 64,906 12,930 12,283 13,080 61,176 58,280 38,883 6,527 5,898 4,949 $164,568 $156,018 $ 121,818 159,473 173,688 180,790 37,044 48,192 72,840 $361,085 $377,898 $ 375,448 2017 $ 29,726 127,353 (11,916) 69,574 12,696 $ 227,433 369,865 (159, 399) $ 437,899 $ 57,946 15,383 42,393 5,524 $ 121,246 216, 297 100, 356 $ 437,899 2018 $ 44,992 105, 688 (7,932) 60, 294 20, 223 $ 223, 265 406,569 (188,527) $ 441,307 $ 41,489 5,038 50,894 6,074 $ 103,495 230, 771 107,041 $ 441,307 2019 $ 32,564 145, 309 (13,806) 98,204 24,333 $ 286,604 499,926 (228,607) $ 557,923 $ 51, 974 17,432 78,262 6,579 $ 154,247 263,558 140, 118 $ 557,923 DAVIDSON YACHTS COMPANY Comparative Statement of Income and Operating Cash Flow For the Years Ended December 31 2014 2015 2016 2017 2017 2018 2019 Sales $ 774,080 $ 731,378 $ 783,980 $935, 978 771,110 955,357 Returns and allowances 39,679 36,945 41,634 47,298 34,187 48,680 Cost of sales 477,808 445,198 461,915549, 678457,569 534,497 Gross margin $256,593 $249,235 $280,431 $339,002 $279,354 $372,180 Depreciation expense $ 29,205 $ 27,588 $ 29,580 $ 35,337 $ 29,258 $ 40,210 Interest expense 18,727 19,687 21, 128 21,605 25,01929,123 Salaries and wages 82,053 73,794 77,976 95,894 93,033 101,577 Accounting and legal 9,954 10,736 9,453 11,964 13,238 1 1,510 Administration expense 79,796 75,364 80,823 96,59988, 12597,571 Other expense 12,760 19,057 15,893 23,033 19,064 22,792 Total expense $ 232,495 $226,226 $234,853 $284,432 $267,737 $302, 783 Net income $ 24,098 $ 23,009 $ 45,578 $ 54,570 $ 11,617 $ 69,397 Cash flow from operations (adjustments to net income) Depreciation $ 27,588 $ 29,580 $ 35,337 $ 29,258 $ 40,210 Decrease (increase) in receivables (2,717) (11,461) (10,448) 17,681 (33, 747) Decrease (increase) in inventory (21,905) (5,138) (6,222) 9,280 (37,910) Decrease (increase) in other current assets (1,130) 3,740 (2,112) (7,527) (4,110) Increase (decrease) in current liabilities (8,550) (34,200)_ (572) (17,751) 50,752 $ 16,295 $ 28,099 $ 70,553 $ 42,558 $ 84,592 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 1. 2. 3. Valuation Method Net book value of equity Earnings multiple Operating cash flow multiple