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 210 to 260 sailboats each year, ranging from 14-foot dinghies to 20-foot sailboats. Their sales prices range from $3,600 to more than $11,600. 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 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 $ 24,860 $ 23,566 $ 20,335 101,065 104,594 114,823 (10,104) (11,186) (9,624) 36,609 58,544 63,712 13,494 14,654 10,944 $ 165,924 $190,172 $ 200,190 263,795 283,608 300,980 (67,584) (95, 042) (124,492) $362,135 $378,738 $ 376,678 $ 84,235 $ 79,887 $ 65, 266 13,230 12,583 13,380 61,476 58,580 39,183 6,827 6,198 5,249 $165,768 $157,248 $ 123,078 159,773 173,988 181,090 36,594 47,502 72,510 $362,135 $378,738 $ 376,678 2017 $ 30,026 127,743 (12,066) 69,964 13,086 $ 228,753 370,165 (159,699) $ 439,219 $ 58,336 15,683 42,693 5,824 $ 122,536 216,597 100,086 $ 439,219 2018 $ 45,292 105,988 (8,082) 60,594 20,523 $ 224,315 406,869 (188,827) $ 442,357 $ 41,789 5, 338 51,194 6,374 $ 104,695 231,071 106,591 $ 442,357 2019 $ 32,864 145, 609 (14,106) 98,534 24,663 $ 287,564 500, 226 (228,907) $ 558,883 $ 52,304 17,732 78,562 6,879 $ 155,477 263,858 139,548 $ 558,883 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 DAVIDSON YACHTS COMPANY Comparative Statement of Income and Operating Cash Flow For the Years Ended December 31 2014 2015 2016 $775,580 $732,878 $785,480 39,979 37,245 41,934 478,708 446,098 462,815 $ 256,893 $ 249,535 $ 280,731 $ 29, 235 $ 27,618 $ 29,610 18,757 19,717 21,158 82,083 73,824 78,006 10,104 11,186 9,483 79,826 75,394 80,853 12,790 19,087 15,923 $ 232,795 $226,826 $ 235,033 2017 $937,478 47,598 550,578 $339, 302 $ 35, 367 21,635 95,924 11,994 96,629 23,063 $ 284,612 2018 772,610 34,487 458,469 $ 279,654 $ 29, 288 25,049 93,063 13,268 88, 155 19,094 $ 267,917 2019 956,857 48,980 535,397 $372,480 $ 40,240 29,153 101,607 11,540 97,601 22,822 $302,963 $ 24,098 $ 22,709 $ 45,698 $ 54,690 $ 11,737 $ 69,517 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 $ 27,618 (2,447) (21,935) (1,160) (8,520) $ 16,265 $ 29,610 (11,791) (5,168) 3,710 (34,170) $ 27,889 $ 35,367 $ 29, 288 (10,478) 17,771 (6,252) 9,370 (2,142) (7,437) (542) (17,841) $ 70,643 $ 42,888 $ 40, 240 (33,597) (37,940) (4,140) 50,782 $ 84,862 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. Valuation Method Net book value of equity 2. Earnings multiple 3. Operating cash flow multiple WN 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 210 to 260 sailboats each year, ranging from 14-foot dinghies to 20-foot sailboats. Their sales prices range from $3,600 to more than $11,600. 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 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 $ 24,860 $ 23,566 $ 20,335 101,065 104,594 114,823 (10,104) (11,186) (9,624) 36,609 58,544 63,712 13,494 14,654 10,944 $ 165,924 $190,172 $ 200,190 263,795 283,608 300,980 (67,584) (95, 042) (124,492) $362,135 $378,738 $ 376,678 $ 84,235 $ 79,887 $ 65, 266 13,230 12,583 13,380 61,476 58,580 39,183 6,827 6,198 5,249 $165,768 $157,248 $ 123,078 159,773 173,988 181,090 36,594 47,502 72,510 $362,135 $378,738 $ 376,678 2017 $ 30,026 127,743 (12,066) 69,964 13,086 $ 228,753 370,165 (159,699) $ 439,219 $ 58,336 15,683 42,693 5,824 $ 122,536 216,597 100,086 $ 439,219 2018 $ 45,292 105,988 (8,082) 60,594 20,523 $ 224,315 406,869 (188,827) $ 442,357 $ 41,789 5, 338 51,194 6,374 $ 104,695 231,071 106,591 $ 442,357 2019 $ 32,864 145, 609 (14,106) 98,534 24,663 $ 287,564 500, 226 (228,907) $ 558,883 $ 52,304 17,732 78,562 6,879 $ 155,477 263,858 139,548 $ 558,883 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 DAVIDSON YACHTS COMPANY Comparative Statement of Income and Operating Cash Flow For the Years Ended December 31 2014 2015 2016 $775,580 $732,878 $785,480 39,979 37,245 41,934 478,708 446,098 462,815 $ 256,893 $ 249,535 $ 280,731 $ 29, 235 $ 27,618 $ 29,610 18,757 19,717 21,158 82,083 73,824 78,006 10,104 11,186 9,483 79,826 75,394 80,853 12,790 19,087 15,923 $ 232,795 $226,826 $ 235,033 2017 $937,478 47,598 550,578 $339, 302 $ 35, 367 21,635 95,924 11,994 96,629 23,063 $ 284,612 2018 772,610 34,487 458,469 $ 279,654 $ 29, 288 25,049 93,063 13,268 88, 155 19,094 $ 267,917 2019 956,857 48,980 535,397 $372,480 $ 40,240 29,153 101,607 11,540 97,601 22,822 $302,963 $ 24,098 $ 22,709 $ 45,698 $ 54,690 $ 11,737 $ 69,517 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 $ 27,618 (2,447) (21,935) (1,160) (8,520) $ 16,265 $ 29,610 (11,791) (5,168) 3,710 (34,170) $ 27,889 $ 35,367 $ 29, 288 (10,478) 17,771 (6,252) 9,370 (2,142) (7,437) (542) (17,841) $ 70,643 $ 42,888 $ 40, 240 (33,597) (37,940) (4,140) 50,782 $ 84,862 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. Valuation Method Net book value of equity 2. Earnings multiple 3. Operating cash flow multiple WN