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 130 to 180 sailboats each year, ranging from 15-foot dinghies to 21-foot sailboats. Their sales prices range from $2,300 to more than $10,300. 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. 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 $ 23,560 $ 22,266 $ 19,035 99,765 103,164 113,263 (9,454) (9,236) (8,974) 35, 309 57,114 62,152 12,194 13, 224 9,384 $161,374 $186,532 $ 194,860 262,495 282,308 299,680 (66, 284) (93,742) (123,192) $357,585 $375,098 $ 371, 348 2017 $ 28,726 126,053 (11,416) 68,274 11,396 $ 223,033 368,865 (158,399) $ 433,499 2018 $ 43,992 104,688 (7,432) 59,294 19, 223 $ 219,765 405,569 (187,527) $ 437,807 2019 $ 31,564 144,309 (12,806) 97,104 23,233 $ 283,404 498,926 (227,607) $ 554,723 $ 82,935 11,930 60,176 5,527 $160,568 158,473 38,544 $357,585 $ 78,457 11,283 57,280 4,898 $151,918 172,688 50,492 $375,098 $ 63,706 12,080 37,883 3,949 $ 117,618 179,790 $ 56,646 14,383 41,393 4,524 $ 116,946 215,297 101, 256 $ 433,499 $ 40,489 4,038 49,894 5,074 $ 99,495 229,771 108,541 $ 437,807 $ 50,874 16,432 77,262 5,579 $ 150, 147 262,558 142,018 $ 554,723 $ 371,348 Sales Returns and allowances Cost of sales Gross margin Depreciation expense Interest expense Salaries and wages Accounting and legal Administration expense Other expense DAVIDSON YACHTS COMPANY Comparative Statement of Income and Operating Cash Flow For the Years Ended December 31 2014 2015 2016 2017 $ 769,080 $726, 378 $778,980 $930, 978 38,679 35,945 4 0,634 46,298 474,808 442,198 458,915 546,678 $255,593 $248,235 $279,431 $338,002 $ 29,105 $ 27,488 $ 29,480 $ 35,237 18,627 19,587 21,028 21,505 81,953 73,694 77,876 95,794 9,454 9,236 9,353 11,864 79,696 75, 264 80,723 96,499 12,660 18,957 15,793 22,933 $231,495 $224,226 $234,253 $283,832 2018 2019 766,110 950, 357 33,187 47,680 454,569 531,497 $278,354 $371,180 $ 29,158 $ 40,110 24,91929,023 92,933 101,477|| 13,138 11,410 88,025 97,471 18,964 22,692 $267,137 $302,183|| Total expense $ 24,009 $ 45,178 $ 54,170 $ 11,217 $ 68,997 Net income $ 24,098 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 $ 27,488 (3,617) (21,805) (1,030) (8,650) $ 16,395 $ 29,480 (10,361) (5,038) 3,840 (34,300) $ 28,799 $ 35,237 (10,348) (6,122) (2,012) (672) $ 70,253 $ 29,158 17,381 8,980 (7,827) (17,451) $ 41,458 $ 40,110 (34,247) (37,810) (4,010) 50,652 $ 83,692 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. 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 130 to 180 sailboats each year, ranging from 15-foot dinghies to 21-foot sailboats. Their sales prices range from $2,300 to more than $10,300. 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. 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 $ 23,560 $ 22,266 $ 19,035 99,765 103,164 113,263 (9,454) (9,236) (8,974) 35, 309 57,114 62,152 12,194 13, 224 9,384 $161,374 $186,532 $ 194,860 262,495 282,308 299,680 (66, 284) (93,742) (123,192) $357,585 $375,098 $ 371, 348 2017 $ 28,726 126,053 (11,416) 68,274 11,396 $ 223,033 368,865 (158,399) $ 433,499 2018 $ 43,992 104,688 (7,432) 59,294 19, 223 $ 219,765 405,569 (187,527) $ 437,807 2019 $ 31,564 144,309 (12,806) 97,104 23,233 $ 283,404 498,926 (227,607) $ 554,723 $ 82,935 11,930 60,176 5,527 $160,568 158,473 38,544 $357,585 $ 78,457 11,283 57,280 4,898 $151,918 172,688 50,492 $375,098 $ 63,706 12,080 37,883 3,949 $ 117,618 179,790 $ 56,646 14,383 41,393 4,524 $ 116,946 215,297 101, 256 $ 433,499 $ 40,489 4,038 49,894 5,074 $ 99,495 229,771 108,541 $ 437,807 $ 50,874 16,432 77,262 5,579 $ 150, 147 262,558 142,018 $ 554,723 $ 371,348 Sales Returns and allowances Cost of sales Gross margin Depreciation expense Interest expense Salaries and wages Accounting and legal Administration expense Other expense DAVIDSON YACHTS COMPANY Comparative Statement of Income and Operating Cash Flow For the Years Ended December 31 2014 2015 2016 2017 $ 769,080 $726, 378 $778,980 $930, 978 38,679 35,945 4 0,634 46,298 474,808 442,198 458,915 546,678 $255,593 $248,235 $279,431 $338,002 $ 29,105 $ 27,488 $ 29,480 $ 35,237 18,627 19,587 21,028 21,505 81,953 73,694 77,876 95,794 9,454 9,236 9,353 11,864 79,696 75, 264 80,723 96,499 12,660 18,957 15,793 22,933 $231,495 $224,226 $234,253 $283,832 2018 2019 766,110 950, 357 33,187 47,680 454,569 531,497 $278,354 $371,180 $ 29,158 $ 40,110 24,91929,023 92,933 101,477|| 13,138 11,410 88,025 97,471 18,964 22,692 $267,137 $302,183|| Total expense $ 24,009 $ 45,178 $ 54,170 $ 11,217 $ 68,997 Net income $ 24,098 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 $ 27,488 (3,617) (21,805) (1,030) (8,650) $ 16,395 $ 29,480 (10,361) (5,038) 3,840 (34,300) $ 28,799 $ 35,237 (10,348) (6,122) (2,012) (672) $ 70,253 $ 29,158 17,381 8,980 (7,827) (17,451) $ 41,458 $ 40,110 (34,247) (37,810) (4,010) 50,652 $ 83,692 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. 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