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 230 to 280 sailboats each year, ranging from 16-foot dinghies to 22-foot sailboats. Their sales prices range from $3,400 to more than $11,400. 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 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.

1. What is the valuation of Davidson Yachts Company using the book value of equity method?

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:

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.

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 $ 24,660 $ 23,366 $ 20,135 100,865 104,374 114,583 (10,004) (10,886) (9,524) 36,409 58,324 63,472 13, 294 14,434 10,704 $165,224 $189,612 $ 199,370 263,595 283,408 300,780 (67,384) (94,842) (124,292) $361,435 $378,178 $ 375,858 $ 84,035 $ 79,667 $ 65,026 13,030 12,383 13,180 61,276 58,380 38,983 6,627 5,998 5,049 $164,968 $156,428 $ 122,238 159,573 173, 788 180, 890 36,894 47,962 72,730 $361,435 $ 378,178 $ 375,858 2017 $ 29,826 127,483 (11,966) 69,704 12,826 $ 227,873 369,965 (159,499) $ 438, 339 $ 58,076 15,483 42,493 5,624 $ 121,676 216,397 100,266 $ 438,339 2018 $ 45,092 105,788 (7,982) 60,394 20,323 $ 223,615 406,669 (188,627) $ 441,657 $ 41,589 5,138 50,994 6,174 $ 103,895 230,871 106,891 $ 441,657 2019 $ 32,664 145,409 (13,906) 98,314 24,443 $ 286,924 500,026 (228,707) $ 558,243 $ 52, 084 17,532 78,362 6,679 $ 154,657 263,658 139,928 $ 558,243 DAVIDSON YACHTS COMPANY Comparative Statement of Income and Operating Cash Flow For the Years Ended December 31 2014 2015 2016 Sales $774,580 $731,878 $784,480 Returns and allowances 39,779 37,045 41,734 Cost of sales 478, 108 445, 498 462,215 Gross margin $256,693 $249,335 $280,531 Depreciation expense $ 29, 215 $ 27,598 $ 29,590 Interest expense 18,737 19,697 21,138 Salaries and wages 82,063 73,804 77,986 Accounting and legal 10,004 10,886 9,463 Administration expense 79, 806 75,374 80,833 Other expense 12,770 19,067 15,903 Total expense $ 232,595 $226,426 $234,913 Net income $ 24,098 $ 22,909 $ 45,618 Cash flow from operations (adjustments to net income) Depreciation $ 27,598 $ 29,590 Decrease (increase) in receivables (2,627) (11,571) Decrease (increase) in inventory (21,915) (5,148) Decrease (increase) in other current assets (1,140) 3,730 Increase (decrease) in current liabilities (8,540) (34,190) $ 16,285 $ 28,029 2017 $936,478 47,398 549,978 $339,102 $ 35,347 21,615 95,984 11,974 96,609 23,043 $ 284,492 2018 771,610 34,287 457,869 $ 279,454 $ 29,268 25,029 93,043 13,248 88,135 19,074 $ 267,797 2019 955,857 48,780 534,797 $372, 280 $ 40, 220 29,133 101,587 11,520 97,581 22,802 $302,843 $ 69,437 $ 54,610 $ 11,657 $ 35,347 (10,458) (6,232) (2,122) (562) $ 70,583 $ 29,268 17,711 9,310 (7,497) (17,781) $ 42,668 $ 40,220 (33,697) (37,920) (4,120) 50,762 $ 84,682 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. 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 $ 24,660 $ 23,366 $ 20,135 100,865 104,374 114,583 (10,004) (10,886) (9,524) 36,409 58,324 63,472 13, 294 14,434 10,704 $165,224 $189,612 $ 199,370 263,595 283,408 300,780 (67,384) (94,842) (124,292) $361,435 $378,178 $ 375,858 $ 84,035 $ 79,667 $ 65,026 13,030 12,383 13,180 61,276 58,380 38,983 6,627 5,998 5,049 $164,968 $156,428 $ 122,238 159,573 173, 788 180, 890 36,894 47,962 72,730 $361,435 $ 378,178 $ 375,858 2017 $ 29,826 127,483 (11,966) 69,704 12,826 $ 227,873 369,965 (159,499) $ 438, 339 $ 58,076 15,483 42,493 5,624 $ 121,676 216,397 100,266 $ 438,339 2018 $ 45,092 105,788 (7,982) 60,394 20,323 $ 223,615 406,669 (188,627) $ 441,657 $ 41,589 5,138 50,994 6,174 $ 103,895 230,871 106,891 $ 441,657 2019 $ 32,664 145,409 (13,906) 98,314 24,443 $ 286,924 500,026 (228,707) $ 558,243 $ 52, 084 17,532 78,362 6,679 $ 154,657 263,658 139,928 $ 558,243 DAVIDSON YACHTS COMPANY Comparative Statement of Income and Operating Cash Flow For the Years Ended December 31 2014 2015 2016 Sales $774,580 $731,878 $784,480 Returns and allowances 39,779 37,045 41,734 Cost of sales 478, 108 445, 498 462,215 Gross margin $256,693 $249,335 $280,531 Depreciation expense $ 29, 215 $ 27,598 $ 29,590 Interest expense 18,737 19,697 21,138 Salaries and wages 82,063 73,804 77,986 Accounting and legal 10,004 10,886 9,463 Administration expense 79, 806 75,374 80,833 Other expense 12,770 19,067 15,903 Total expense $ 232,595 $226,426 $234,913 Net income $ 24,098 $ 22,909 $ 45,618 Cash flow from operations (adjustments to net income) Depreciation $ 27,598 $ 29,590 Decrease (increase) in receivables (2,627) (11,571) Decrease (increase) in inventory (21,915) (5,148) Decrease (increase) in other current assets (1,140) 3,730 Increase (decrease) in current liabilities (8,540) (34,190) $ 16,285 $ 28,029 2017 $936,478 47,398 549,978 $339,102 $ 35,347 21,615 95,984 11,974 96,609 23,043 $ 284,492 2018 771,610 34,287 457,869 $ 279,454 $ 29,268 25,029 93,043 13,248 88,135 19,074 $ 267,797 2019 955,857 48,780 534,797 $372, 280 $ 40, 220 29,133 101,587 11,520 97,581 22,802 $302,843 $ 69,437 $ 54,610 $ 11,657 $ 35,347 (10,458) (6,232) (2,122) (562) $ 70,583 $ 29,268 17,711 9,310 (7,497) (17,781) $ 42,668 $ 40,220 (33,697) (37,920) (4,120) 50,762 $ 84,682 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