DAVIDSON YACHTS COMPANY Comparative Statement of Income and Operating Cash Flow For the Years Ended December 31 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 2014 $769,580 2015 $726,878 2016 $779,480 2017 $931,478 2018 766,610 2019 950,857 38,779 475,108 $255,693 $ 29,115 18,637 36,045 442,498 $248,335 $ 27,498 19,597 $ 29,490 40,734 459,215 46,398 33,287 47,780 $279,531 21,038 546,978 $338,102 $ 35,247 21,515 454,869 $278,454 531,797 $371,280 24,929 81,963 73,704 77,886 95,804 92,943 $ 29,168 $ 40,120 29,033 101,487 9,504 9,386 9,363 11,874 13,148 11,420 79,706 75,274 80,733 96,509 88,035 97,481 12,670 18,967 $231,595 $224,426 $283,892 $ 24,098 $ 23,909 $ 27,498 (3,527) (21,815) (1,040) 15,803 $234,313 $ 45,218 $ 29,490 (10,471) (5,048) 3,830 (34,290) (8,640) $ 16,385 $ 28,729 $ 54,210 $ 35,247 (10,358) (6,132) (2,022) (662) $ 70,283 18,974 $267,197 $ 11,257 $ 29,168 17,411 9,010 (7,797) (17,481) $ 41,568 22,702 $302,243 $ 69,037 $ 40,120 (34,197) (37,820) (4,020) 50,662 $ 83,782 22,943 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 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 140 to 190 sailboats each year, ranging from 16-foot dinghies to 22-foot sailboats. Their sales prices range from $2,400 to more than $10,400. 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. Cash Accounts receivable Allowance for bad debts Inventory DAVIDSON YACHTS COMPANY Comparative Balance Sheet 2014 $ 23,660 99,865 (9,504) December 31 2015 $ 22,366 103,274 2016 $ 19,135 113,383 (9,024) 62,272 9,504 2017 $ 28,826 2018 $ 44,092 2019 $ 31,664 (9,386) 57,224 35,409 Other current assets 12,294 Total current assets $161,724 Property and equipment Accumulated depreciation Total assets Accounts payable Taxes payable Short-term loans Accrued payroll payable Total current liabilities Long-term debt 262,595 (66,384) $357,935 $ 83,035 12,030 60,276 57,380 5,627 4,998 $160,968 158,573 Equity 38,394 Total liabilities and equity $357,935 $152,328 172,788 50,262 $375,378 $ 118,038 179,890 73,830 $ 371,758 13,334 $186,812 282,408 (93,842) $375,378 $ 78,567 11,383 $ 195,270 299,780 (123,292) $ 371,758 $ 63,826 12,180 37,983 4,049 126,183 (11,466) 68,404 11,526 $ 223,473 368,965 (158,499) $ 433,939 $ 56,776 14,483 41,493 4,624 $ 117,376 215,397 101,166 $ 433,939 104,788 (7,482) 59,394 19,323 $ 220,115 405,669 (187,627) 144,409 (12,906) 97,214 23,343 $ 283,724 499,026 (227,707) $ 555,043 $ 438,157 $ 40,589 4,138 49,994 $ 50,984 16,532 77,362 $ 5,174 99,895 229,871 108,391 5,679 $ 438,157 $ 150,557 262,658 141,828 $ 555,043