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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 200 to 250 sailboats each year, ranging from 15-foot dinghies to 21-foot sailboats. Their sales prices range from $3,100 to more than $11,100. 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.

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.

DAVIDSON YACHTS COMPANY Comparative Balance Sheet December 31 2014 2015 2016 2017 2018 2019 $ 24,360 100,565 $ 23,066 104,044 (10,436) 57,994 14,104 $188,772 283,108 Cash 29,526 19,835 114,223 (9,374) 63,112 10,344 $ 198,140 300,480 (123,992) 44,792 105,488 (7,832) 60,094 20,023 $222,565 406,369 32,364 145,109 (13,606) 97,984 Accounts receivable 127,093 (11,816) 69,314 Allowance for bad debts (9,854) 36,109 Inventory Other current assets 12,994 $164,174 263,295 (67,084) 12,436 $ 226,553 369,665 (159,199) 24,113 $ 285,964 499,726 Total current assets Property and equipment Accumulated depreciation (94,542) (188,327) $ 440,607 (228,407) $ 557,283 $360,385 $377,338 $374,628 $437,019 Total assets $ 83,735 12,730 60,976 6,327 $163,768 159,273 37,344 $ 79,337 12,083 Accounts payable Taxes payable Short-term loans Accrued payroll payable 41,289 4,838 50,694 51,754 17,232 64,666 57,686 12,880 38,683 15,183 42,193 78,062 6,379 $ 153,427 58,080 5,698 $155,198 4,749 $ 120,978 180,590 5,324 $ 120,386 216,097 100,536 5,874 $ 102,695 Total current liabilities Long-term debt Equity Total liabilities and equity 173,488 48,652 230,571 107,341 263,358 140,498 73,060 $360,385 $377,338 $374,628 $437,019 $440,607 $557,283 DAVIDSON YACHTS COMPANY Comparative Statement of Income and Operating Cash Flow For the Years Ended December 31 2014 2016 2017 2018 2015 2019 Sales Returns and allowances Cost of sales Gross margin Depreciation expense Interest expense Salaries and wages $773,080 $730,378 $782,980 41,434 461,315 $280,231 $29,560 21,108 $934,978 770,110 954,357 36,745 444,598 $249,035 $ 27,568 19,667 39,479 477,208 47,098 549,078 33,987 456,969 $279,154 $ 29,238 24,999 93,013 48,480 533,897 $371,980 $ 40,190 29,103 101,557 11,490 $256,393 $ 29,185 $338,802 $35,317 21,585 95,874 11,944 96,579 18,707 82,033 9,854 79,776 73,774 10,436 75,344 77,956 9,433 80,803 15,873 Accounting and legal Administration expense 13,218 88,105 19,044 97,551 22,772 Other expense 12,740 19,037 23,013 Total expense $232,295 $225,826 $234,733 $284,312 $267,617 $302,663 $ 54,490 $ 11,537 $ 23,209 24,098 45,498 $69,317 Net income 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 $ 27,568 (2,897) $ 40,190 (33,847) (37,890) $35,317 $29,560 29,238 17,621 9,220 (11,241) (5,118) 3,760 (10,428) (6,202) (2,092) (21,885) (1,110) (8,570) (7,587) (17,691) $ 42,338 (4,090) 50,732 (34,220) $ 28,239 (592) $ 70,493 $ 16,315 $ 84,412 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. DAVIDSON YACHTS COMPANY Comparative Balance Sheet December 31 2014 2015 2016 2017 2018 2019 $ 24,360 100,565 $ 23,066 104,044 (10,436) 57,994 14,104 $188,772 283,108 Cash 29,526 19,835 114,223 (9,374) 63,112 10,344 $ 198,140 300,480 (123,992) 44,792 105,488 (7,832) 60,094 20,023 $222,565 406,369 32,364 145,109 (13,606) 97,984 Accounts receivable 127,093 (11,816) 69,314 Allowance for bad debts (9,854) 36,109 Inventory Other current assets 12,994 $164,174 263,295 (67,084) 12,436 $ 226,553 369,665 (159,199) 24,113 $ 285,964 499,726 Total current assets Property and equipment Accumulated depreciation (94,542) (188,327) $ 440,607 (228,407) $ 557,283 $360,385 $377,338 $374,628 $437,019 Total assets $ 83,735 12,730 60,976 6,327 $163,768 159,273 37,344 $ 79,337 12,083 Accounts payable Taxes payable Short-term loans Accrued payroll payable 41,289 4,838 50,694 51,754 17,232 64,666 57,686 12,880 38,683 15,183 42,193 78,062 6,379 $ 153,427 58,080 5,698 $155,198 4,749 $ 120,978 180,590 5,324 $ 120,386 216,097 100,536 5,874 $ 102,695 Total current liabilities Long-term debt Equity Total liabilities and equity 173,488 48,652 230,571 107,341 263,358 140,498 73,060 $360,385 $377,338 $374,628 $437,019 $440,607 $557,283 DAVIDSON YACHTS COMPANY Comparative Statement of Income and Operating Cash Flow For the Years Ended December 31 2014 2016 2017 2018 2015 2019 Sales Returns and allowances Cost of sales Gross margin Depreciation expense Interest expense Salaries and wages $773,080 $730,378 $782,980 41,434 461,315 $280,231 $29,560 21,108 $934,978 770,110 954,357 36,745 444,598 $249,035 $ 27,568 19,667 39,479 477,208 47,098 549,078 33,987 456,969 $279,154 $ 29,238 24,999 93,013 48,480 533,897 $371,980 $ 40,190 29,103 101,557 11,490 $256,393 $ 29,185 $338,802 $35,317 21,585 95,874 11,944 96,579 18,707 82,033 9,854 79,776 73,774 10,436 75,344 77,956 9,433 80,803 15,873 Accounting and legal Administration expense 13,218 88,105 19,044 97,551 22,772 Other expense 12,740 19,037 23,013 Total expense $232,295 $225,826 $234,733 $284,312 $267,617 $302,663 $ 54,490 $ 11,537 $ 23,209 24,098 45,498 $69,317 Net income 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 $ 27,568 (2,897) $ 40,190 (33,847) (37,890) $35,317 $29,560 29,238 17,621 9,220 (11,241) (5,118) 3,760 (10,428) (6,202) (2,092) (21,885) (1,110) (8,570) (7,587) (17,691) $ 42,338 (4,090) 50,732 (34,220) $ 28,239 (592) $ 70,493 $ 16,315 $ 84,412 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