Davidson Yachts sells approximately 120 to 170 sailboats each year, ranging from 14-foot dinghies to 20-foot sailboats. Their sales prices range from $2,200 to more than $10,200. 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 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.

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 $ 23,460 $ 22,166 $ 18,935 99,665 103,054 113, 143 (9,404) (9,086) (8,924) 35,209 57,004 62,032 12,094 13,114 9,264 $ 161,024 $186,252 $ 194,450 262,395 282,208 299,580 (66,184) (93,642) (123,092) $357, 235 $374,818 $ 370,938 $ 82,835 $ 78, 347 $ 63,586 11,830 11,183 11,980 60,076 57,180 37,783 5,427 4,798 3,849 $160,168 $ 151,508 $ 117,198 158,373 172,588 179,690 38,694 50,722 74,050 $357,235 $374,818 $ 370,938 2017 $ 28,626 125,923 (11,366) 68,144 11,266 $ 222,593 368,765 (158,299) $ 433,059 $ 56,516 14,283 41,293 4,424 $ 116,516 215,197 101,346 $ 433,059 2018 $ 43,892 104,588 (7,382) 59,194 19,123 $ 219,415 405,469 (187,427) $ 437,457 $ 40,389 3,938 49,794 4,974 $ 99,095 229,671 108,691 $ 437,457 2019 $ 31,464 144,209 (12,706) 96,994 23,123 $ 283, 084 498,826 (227,507) $ 554,403 $ 50,764 16,332 77,162 5,479 $ 149,737 262,458 142,208 $ 554,403 DAVIDSON YACHTS COMPANY Comparative Statement of Income and Operating Cash Flow For the Years Ended December 31 2014 2015 2016 Sales $768,580 $725,878 $778,480 Returns and allowances 38,579 35,845 40,534 Cost of sales 474,508 441,898 458,615 Gross margin $255,493 $248,135 $ 279,331 Depreciation expense $ 29,095 $ 27,478 $ 29,470 Interest expense 18,617 19,577 21,018 Salaries and wages 81,943 73,684 77,866 Accounting and legal 9,404 9,086 9,343 Administration expense 79,686 75,254 80,713 Other expense 12,650 18,947 15,783 Total expense $ 231,395 $ 224,026 $ 234,193 Net income $ 24,098 $ 24,109 $ 45,138 Cash flow from operations (adjustments to net income) Depreciation $ 27,478 $ 29,470 Decrease (increase) in receivables (3,707) (10,251) Decrease (increase) in inventory (21,795) (5,028) Decrease (increase) in other current assets (1,020) 3,850 Increase (decrease) in current liabilities (8,660) (34,310) $ 16,405 $ 28,869 2017 $930,478 46,198 546,378 $337,902 $ 35,227 21,495 95,784 11,854 96,489 22,923 $ 283,772 $ 54,130 2018 765,610 33,087 454,269 $278,254 $ 29,148 24,909 92,923 13,128 88,015 18,954 $ 267,077 2019 949,857 47,580 531,197 $371,080 $ 40,100 29,013 101,467 11,400 97,461 22,682 $302,123 $ 11,177 $ 68,957 $ 35,227 (10,338) (6,112) (2,002) (682) $ 70,223 $ 29,148 17,351 8,950 (7,857) (17,421) $ 41,348 $ 40,100 (34,297) (37,800) (4,000) 50,642 $ 83,602 Valuation Valuation Method 1. Net book value of equity 2. Earnings multiple 3. Operating cash flow multiple 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 $ 23,460 $ 22,166 $ 18,935 99,665 103,054 113, 143 (9,404) (9,086) (8,924) 35,209 57,004 62,032 12,094 13,114 9,264 $ 161,024 $186,252 $ 194,450 262,395 282,208 299,580 (66,184) (93,642) (123,092) $357, 235 $374,818 $ 370,938 $ 82,835 $ 78, 347 $ 63,586 11,830 11,183 11,980 60,076 57,180 37,783 5,427 4,798 3,849 $160,168 $ 151,508 $ 117,198 158,373 172,588 179,690 38,694 50,722 74,050 $357,235 $374,818 $ 370,938 2017 $ 28,626 125,923 (11,366) 68,144 11,266 $ 222,593 368,765 (158,299) $ 433,059 $ 56,516 14,283 41,293 4,424 $ 116,516 215,197 101,346 $ 433,059 2018 $ 43,892 104,588 (7,382) 59,194 19,123 $ 219,415 405,469 (187,427) $ 437,457 $ 40,389 3,938 49,794 4,974 $ 99,095 229,671 108,691 $ 437,457 2019 $ 31,464 144,209 (12,706) 96,994 23,123 $ 283, 084 498,826 (227,507) $ 554,403 $ 50,764 16,332 77,162 5,479 $ 149,737 262,458 142,208 $ 554,403 DAVIDSON YACHTS COMPANY Comparative Statement of Income and Operating Cash Flow For the Years Ended December 31 2014 2015 2016 Sales $768,580 $725,878 $778,480 Returns and allowances 38,579 35,845 40,534 Cost of sales 474,508 441,898 458,615 Gross margin $255,493 $248,135 $ 279,331 Depreciation expense $ 29,095 $ 27,478 $ 29,470 Interest expense 18,617 19,577 21,018 Salaries and wages 81,943 73,684 77,866 Accounting and legal 9,404 9,086 9,343 Administration expense 79,686 75,254 80,713 Other expense 12,650 18,947 15,783 Total expense $ 231,395 $ 224,026 $ 234,193 Net income $ 24,098 $ 24,109 $ 45,138 Cash flow from operations (adjustments to net income) Depreciation $ 27,478 $ 29,470 Decrease (increase) in receivables (3,707) (10,251) Decrease (increase) in inventory (21,795) (5,028) Decrease (increase) in other current assets (1,020) 3,850 Increase (decrease) in current liabilities (8,660) (34,310) $ 16,405 $ 28,869 2017 $930,478 46,198 546,378 $337,902 $ 35,227 21,495 95,784 11,854 96,489 22,923 $ 283,772 $ 54,130 2018 765,610 33,087 454,269 $278,254 $ 29,148 24,909 92,923 13,128 88,015 18,954 $ 267,077 2019 949,857 47,580 531,197 $371,080 $ 40,100 29,013 101,467 11,400 97,461 22,682 $302,123 $ 11,177 $ 68,957 $ 35,227 (10,338) (6,112) (2,002) (682) $ 70,223 $ 29,148 17,351 8,950 (7,857) (17,421) $ 41,348 $ 40,100 (34,297) (37,800) (4,000) 50,642 $ 83,602 Valuation Valuation Method 1. Net book value of equity 2. Earnings multiple 3. Operating cash flow multiple