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 15-foot dinghies to 21-foot sailboats. Their sales prices range from $3,800 to more than $11,800. 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.

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.

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 $ 25,060 $ 23,766 $ 20,535 101,265 104,814 115,063 (10,204) (11,486) (9,724) 36,809 58,764 63,952 13,694 14,874 11,184 $166,624 $190,732 $ 201,010 263,995 283,808 301,180 (67,784) (95,242) (124,692) $362,835 $379,298 $ 377,498 $ 84,435 $ 80, 107 $ 65,506 13,430 12,783 13,580 61,676 58,780 39,383 7,027 6,398 5,449 $166,568 $158,068 $ 123,918 159,973 174,188 181, 290 36,294 47,042 72,290 $362,835 $379,298 $ 377,498 2017 $ 30,226 128, 003 (12,166) 70,224 13,346 $ 229,633 370,365 (159,899) $ 440,099 $ 58,596 15,883 42,893 6,024 $ 123, 396 216,797 99,906 $ 440,099 2018 $ 45,492 106,188 (8,182) 60,794 20,723 $ 225,015 407,069 (189,027) $ 443,057 $ 41,989 5,538 51,394 6,574 $ 105,495 231,271 106,291 $ 443,057 2019 $ 33,064 145, 809 (14,306) 98,754 24,883 $ 288, 204 500,426 (229,107) $ 559,523 $ 52,524 17,932 78,762 7,079 $ 156,297 264,058 139,168 $ 559,523 DAVIDSON YACHTS COMPANY Comparative Statement of Income and Operating Cash Flow For the Years Ended December 31 2014 2015 2016 Sales $776,580 $733,878 $786,480 Returns and allowances 40,179 37,445 42,134 Cost of sales 479,308 446,698 463,415 Gross margin $257,093 $249,735 $280,931 Depreciation expense $ 29,255 $ 27,638 $ 29,630 Interest expense 18,777 19,737 21,178 Salaries and wages 82,103 73,844 78,026 Accounting and legal 10, 204 11,486 9,503 Administration expense 79,846 75,414 80,873 Other expense 12,810 19,107 15,943 Total expense $232,995 $227, 226 $235,153 Net income $ 24,098 $ 22,509 $ 45,778 Cash flow from operations (adjustments to net income) Depreciation $ 27,638 $ 29,630 Decrease (increase) in receivables (2,267) (12,011) Decrease (increase) in inventory (21,955) (5,188) Decrease (increase) in other current assets (1,180) 3,690 Increase (decrease) in current liabilities (8,500) (34,150) $ 16,245 $ 27,749 2017 $938, 478 47,798 551,178 $339,502 $ 35,387 21,655 95,944 12,014 96,649 23,083 $284,732 2018 773,610 34,687 459,069 $279,854 $ 29,308 25,069 93,083 13, 288 88,175 19, 114 $268,037 2019 957,857 49,180 535,997 $372,680 $ 40, 260 29,173 101,627 11,560 97,621 22,842 $303,083 $ 69,597 $ 54,770 $ 11,817 $ 35,387 (10,498) (6,272) (2,162) (522) $ 70, 703 $ 29, 308 17,831 9,430 (7,377) (17,901) $ 43, 108 $ 40,260 (33,497) (37,960) (4,160) 50, 802 $ 85,042 Valuation Valuation Method 1. Net book value of equity 2. Earnings multiple 3. Operating cash flow multiple