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 200 to 250 sailboats each year, ranging from 15-foot dinghies to 21-foot sailboats. Their sales prices range from $3,100 to more than $11,100. 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 20142019 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 2014 2015 2016 2017 2018 2019 Cash $ 24,360 $ 23,066 $ 19,835 $ 29,526 $ 44,792 $ 32,364 Accounts receivable 100,565 104,044 114,223 127,093 105,488 145,109 Allowance for bad debts (9,854 ) (10,436 ) (9,374 ) (11,816 ) (7,832 ) (13,606 ) Inventory 36,109 57,994 63,112 69,314 60,094 97,984 Other current assets 12,994 14,104 10,344 12,436 20,023 24,113 Total current assets $ 164,174 $ 188,772 $ 198,140 $ 226,553 $ 222,565 $ 285,964 Property and equipment 263,295 283,108 300,480 369,665 406,369 499,726 Accumulated depreciation (67,084 ) (94,542 ) (123,992 ) (159,199 ) (188,327 ) (228,407 ) Total assets $ 360,385 $ 377,338 $ 374,628 $ 437,019 $ 440,607 $ 557,283 Accounts payable $ 83,735 $ 79,337 $ 64,666 $ 57,686 $ 41,289 $ 51,754 Taxes payable 12,730 12,083 12,880 15,183 4,838 17,232 Short-term loans 60,976 58,080 38,683 42,193 50,694 78,062 Accrued payroll payable 6,327 5,698 4,749 5,324 5,874 6,379 Total current liabilities $ 163,768 $ 155,198 $ 120,978 $ 120,386 $ 102,695 $ 153,427 Long-term debt 159,273 173,488 180,590 216,097 230,571 263,358 Equity 37,344 48,652 73,060 100,536 107,341 140,498 Total liabilities and equity $ 360,385 $ 377,338 $ 374,628 $ 437,019 $ 440,607 $ 557,283 DAVIDSON YACHTS COMPANY Comparative Statement of Income and Operating Cash Flow For the Years Ended December 31 2014 2015 2016 2017 2018 2019 Sales $ 773,080 $ 730,378 $ 782,980 $ 934,978 770,110 954,357 Returns and allowances 39,479 36,745 41,434 47,098 33,987 48,480 Cost of sales 477,208 444,598 461,315 549,078 456,969 533,897 Gross margin $ 256,393 $ 249,035 $ 280,231 $ 338,802 $ 279,154 $ 371,980 Depreciation expense $ 29,185 $ 27,568 $ 29,560 $ 35,317 $ 29,238 $ 40,190 Interest expense 18,707 19,667 21,108 21,585 24,999 29,103 Salaries and wages 82,033 73,774 77,956 95,874 93,013 101,557 Accounting and legal 9,854 10,436 9,433 11,944 13,218 11,490 Administration expense 79,776 75,344 80,803 96,579 88,105 97,551 Other expense 12,740 19,037 15,873 23,013 19,044 22,772 Total expense $ 232,295 $ 225,826 $ 234,733 $ 284,312 $ 267,617 $ 302,663 Net income $ 24,098 $ 23,209 $ 45,498 $ 54,490 $ 11,537 $ 69,317 Cash flow from operations (adjustments to net income) Depreciation $ 27,568 $ 29,560 $ 35,317 $ 29,238 $ 40,190 Decrease (increase) in receivables (2,897 ) (11,241 ) (10,428 ) 17,621 (33,847 ) Decrease (increase) in inventory (21,885 ) (5,118 ) (6,202 ) 9,220 (37,890 ) Decrease (increase) in other current assets (1,110 ) 3,760 (2,092 ) (7,587 ) (4,090 ) Increase (decrease) in current liabilities (8,570 ) (34,220 ) (592 ) (17,691 ) 50,732 $ 16,315 $ 28,239 $ 70,493 $ 42,338 $ 84,412 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 Davidsons 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.