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 $3,200 to more than $11.200. 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-tern debt Equity Total liabilities and equity DAVIDSON YACHTS COMPANY Comparative Balance Sheet December 31 2014 2015 2016 $ 24,468 $ 23,166 $ 19,935 182,665 184,154 114, 343 (9,984) (10,586) (9,424) 36, 289 58, 104 63,232 13, e94 14, 214 10,464 $164,524 $189,052 $ 198,550 263,395 283,208 300, 580 (67, 184) (94,642) (124,992) $360, 735 5377,618 $375,038 $ 83,835 $ 79,447 $ 64,786 12,830 12,183 12,980 61,076 58,188 38,789 6,427 5,798 4,849 $164, 168 $155,608 $121,398 159,373 173,588 188,690 37,194 48,422 72,950 $360, 735 $377,618 $ 375,038 2017 $ 29,626 127,223 (11,866 69,444 12,566 $ 226,993 369,765 (159,299) $ 437,459 $ 57,816 15,283 42,293 5,424 $ 120,816 216,197 100, 446 $ 437,459 2018 $ 44,892 185,588 (7,882) 60, 194 2e, 123 $ 222,915 486, 469 (188, 427) $ 440,957 $ 41,389 4,938 50,794 5,974 $ 103,095 238,671 1e7.191 $ 440,957 2019 $ 32,464 145,209 (13,786) 98,094 24, 223 $ 286, 284 499,826 (228,507) $ 557,683 $ 51,864 17,352 78,162 6,479 $ 153,837 263,458 140,388 $ 557,503 DAVIDSON YACHTS COMPANY Comparative statement of Income and Operating Cash Flow For the Years Ended December 31 2014 2015 2016 Sales $773,58e $730,878 $783,480 Returns and allowances 39,579 36,845 41,534 Cost of sales 477,508 444,898 461,615 Gross margin $256,493 $249,135 $289, 331 Depreciation expense $ 29,195 $ 27,578 $ 29,578 Interest expense 18,717 19,677 21,118 Salaries and wages 82,043 73,784 77,966 Accounting and legal 9,904 10,586 9,443 Administration expense 79,786 75,354 80,813 Other expense 12,750 19,647 15,883 Total expense $232,395 $226,026 $234,793 Net income $ 24,098 $ 23,109 $ 45,538 Cash flow from operations (adjustments to net income) Depreciation $ 27,578 $ 29,578 Decrease increase) in receivables (2,887) (11,351) Decrease increase) in inventory (21,895 (5,128 Decrease (increase in other current assets (1.120) 3,750 Increase (decrease in current liabilities (8,562) (34,210) $ 16,385 $ 28, 169 2017 $935,478 47,198 549,378 $338,902 $ 35, 327 21,595 95,884 11,954 96,589 23,023 $284,372 $ 54,530 2818 778,610 34,087 457,269 $279,254 $ 29,248 25, ee9 93,023 13,228 88,115 19,054 $267,677 $ 11,577 2019 954,857 48,588 534,197 $372,888 $ 40, zee 29,113 101.567 11,5ee 97,561 22,782 $382,723 $ 69,357 $ 35, 327 (18,438) (6,212) (2,102) (582) $ 70,523 $ 29,248 17,651 9,250 (7.557) (17,722) 542,448 $ 48,200 (33,797) (37,9ee) (4,18e 50, 742 $ 84,502 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 Valuation Method 1. Net book value of equity 2. Earnings multiple 3. Operating cash flow multiple 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 $3,200 to more than $11.200. 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-tern debt Equity Total liabilities and equity DAVIDSON YACHTS COMPANY Comparative Balance Sheet December 31 2014 2015 2016 $ 24,468 $ 23,166 $ 19,935 182,665 184,154 114, 343 (9,984) (10,586) (9,424) 36, 289 58, 104 63,232 13, e94 14, 214 10,464 $164,524 $189,052 $ 198,550 263,395 283,208 300, 580 (67, 184) (94,642) (124,992) $360, 735 5377,618 $375,038 $ 83,835 $ 79,447 $ 64,786 12,830 12,183 12,980 61,076 58,188 38,789 6,427 5,798 4,849 $164, 168 $155,608 $121,398 159,373 173,588 188,690 37,194 48,422 72,950 $360, 735 $377,618 $ 375,038 2017 $ 29,626 127,223 (11,866 69,444 12,566 $ 226,993 369,765 (159,299) $ 437,459 $ 57,816 15,283 42,293 5,424 $ 120,816 216,197 100, 446 $ 437,459 2018 $ 44,892 185,588 (7,882) 60, 194 2e, 123 $ 222,915 486, 469 (188, 427) $ 440,957 $ 41,389 4,938 50,794 5,974 $ 103,095 238,671 1e7.191 $ 440,957 2019 $ 32,464 145,209 (13,786) 98,094 24, 223 $ 286, 284 499,826 (228,507) $ 557,683 $ 51,864 17,352 78,162 6,479 $ 153,837 263,458 140,388 $ 557,503 DAVIDSON YACHTS COMPANY Comparative statement of Income and Operating Cash Flow For the Years Ended December 31 2014 2015 2016 Sales $773,58e $730,878 $783,480 Returns and allowances 39,579 36,845 41,534 Cost of sales 477,508 444,898 461,615 Gross margin $256,493 $249,135 $289, 331 Depreciation expense $ 29,195 $ 27,578 $ 29,578 Interest expense 18,717 19,677 21,118 Salaries and wages 82,043 73,784 77,966 Accounting and legal 9,904 10,586 9,443 Administration expense 79,786 75,354 80,813 Other expense 12,750 19,647 15,883 Total expense $232,395 $226,026 $234,793 Net income $ 24,098 $ 23,109 $ 45,538 Cash flow from operations (adjustments to net income) Depreciation $ 27,578 $ 29,578 Decrease increase) in receivables (2,887) (11,351) Decrease increase) in inventory (21,895 (5,128 Decrease (increase in other current assets (1.120) 3,750 Increase (decrease in current liabilities (8,562) (34,210) $ 16,385 $ 28, 169 2017 $935,478 47,198 549,378 $338,902 $ 35, 327 21,595 95,884 11,954 96,589 23,023 $284,372 $ 54,530 2818 778,610 34,087 457,269 $279,254 $ 29,248 25, ee9 93,023 13,228 88,115 19,054 $267,677 $ 11,577 2019 954,857 48,588 534,197 $372,888 $ 40, zee 29,113 101.567 11,5ee 97,561 22,782 $382,723 $ 69,357 $ 35, 327 (18,438) (6,212) (2,102) (582) $ 70,523 $ 29,248 17,651 9,250 (7.557) (17,722) 542,448 $ 48,200 (33,797) (37,9ee) (4,18e 50, 742 $ 84,502 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 Valuation Method 1. Net book value of equity 2. Earnings multiple 3. Operating cash flow multiple