Required information [The following information applies to the questions displayed below.) Davidson Yachts is a small private 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 140 to 190 sailboats each year, ranging from 16-foot dinghies to 22-foot sailboats. Their sales prices range from $2,400 to more than $10,400. 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 2017 to 2022 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 DAVIDSON YACHTS COMPANY Comparative Balance Sheet December 31 2017 2018 2019 $ 23,660 $ 22,366 $ 19,135 99,865 103,274 113,383 (9,504) (9,386) (9,024) 35, 409 57, 224 62,272 12,294 13,334 9,504 $ 161,724 $ 186, 812 $ 195,270 262,595 282, 408 299,780 (66,384) (93,842) (123,292) $ 357, 935 $ 375, 378 $ 371,758 $ 83,035 $ 78,567 $ 63,826 12,030 11,383 12,180 60, 276 57,380 37,983 5,627 4,998 4,049 $ 160,968 $ 152, 328 $ 118,038 158,573 172, 788 179,890 38, 394 50,262 73,830 $ 357,935 $ 375,378 $ 371,758 2020 $ 28,826 126,183 (11,466) 68,404 11,526 $ 223,473 368,965 (158, 499) $ 433,939 2021 $ 44,092 104,788 (7,482) 59,394 19, 323 $ 220, 115 405,669 (187,627) $ 438,157 2022 $31,664 144,409 (12,906) 97,214 23, 343 $283,724 499, 026 (227,707) $555,043 Total assets Accounts payable Taxes payable Short-term loans Accrued payroll payable Total current liabilities Long-term debt Equity Total liabilities and equity $ 56,776 14,483 41,493 4,624 $ 117,376 215,397 101,166 $ 433,939 $ 40,589 4,138 49,994 5, 174 $ 99,895 229,871 108,391 $ 438,157 $50,984 16,532 77,362 5,679 $ 150,557 262,658 141,828 $ 555,043 Sales Returns and allowances Cost of sales Gross margin Depreciation expense Interest expense Salaries and wages Accounting and legal Administration expense Other expense Total expense DAVIDSON YACHTS COMPANY Comparative Statement of Income and Operating Cash Flow For the Years Ended December 31 2017 2018 2019 2020 $ 769,580 $ 726,878 $ 779,480 $ 931,478 38,779 36,045 40,734 46,398 475, 108 442,498 459, 215 546,978 $ 255,693 $ 248,335 $ 279,531 $ 338, 102 $ 29,115 $ 27, 498 $ 29,490 $ 35, 247 18,637 19,597 21,038 21,515 81,963 73,704 77,886 95,804 9,504 9,386 9,363 11,874 79,706 75, 274 80,733 96,509 12,670 18,967 15,803 22,943 $ 231,595 $ 224,426 $ 234,313 $ 283,892 2021 $ 766,610 33,287 454,869 $ 278, 454 $ 29,168 24,929 92,943 13,148 88,035 18,974 $ 267,197 2022 $ 950,857 47,780 531,797 $ 371,280 $ 40,120 29,033 | 101,487 11,420 | 97,481 22,702 $302,243 Net income $ 24,098 $ 23,909 $ 45,218 $ 54,210 $ 11,257 $ 69,037 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, 498 (3,527) (21,815) (1,040) (8,640) $ 16,385 $ 29,490 (10,471) (5,048) 3,830 (34,290) $ 28,729 $ 35,247 (10,358) (6,132) (2,022) (662) $ 70,283 $ 29,168 17,411 9,010 (7,797) (17,481) $ 41,568 $ 40,120 |(34,197) (37,820) | (4,020) 50,662 $ 83,782 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. 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. Valuation Method Valuation 1. 2. Net book value of equity Earnings multiple Operating cash flow multiple 3. Required information [The following information applies to the questions displayed below.) Davidson Yachts is a small private 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 140 to 190 sailboats each year, ranging from 16-foot dinghies to 22-foot sailboats. Their sales prices range from $2,400 to more than $10,400. 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 2017 to 2022 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 DAVIDSON YACHTS COMPANY Comparative Balance Sheet December 31 2017 2018 2019 $ 23,660 $ 22,366 $ 19,135 99,865 103,274 113,383 (9,504) (9,386) (9,024) 35, 409 57, 224 62,272 12,294 13,334 9,504 $ 161,724 $ 186, 812 $ 195,270 262,595 282, 408 299,780 (66,384) (93,842) (123,292) $ 357, 935 $ 375, 378 $ 371,758 $ 83,035 $ 78,567 $ 63,826 12,030 11,383 12,180 60, 276 57,380 37,983 5,627 4,998 4,049 $ 160,968 $ 152, 328 $ 118,038 158,573 172, 788 179,890 38, 394 50,262 73,830 $ 357,935 $ 375,378 $ 371,758 2020 $ 28,826 126,183 (11,466) 68,404 11,526 $ 223,473 368,965 (158, 499) $ 433,939 2021 $ 44,092 104,788 (7,482) 59,394 19, 323 $ 220, 115 405,669 (187,627) $ 438,157 2022 $31,664 144,409 (12,906) 97,214 23, 343 $283,724 499, 026 (227,707) $555,043 Total assets Accounts payable Taxes payable Short-term loans Accrued payroll payable Total current liabilities Long-term debt Equity Total liabilities and equity $ 56,776 14,483 41,493 4,624 $ 117,376 215,397 101,166 $ 433,939 $ 40,589 4,138 49,994 5, 174 $ 99,895 229,871 108,391 $ 438,157 $50,984 16,532 77,362 5,679 $ 150,557 262,658 141,828 $ 555,043 Sales Returns and allowances Cost of sales Gross margin Depreciation expense Interest expense Salaries and wages Accounting and legal Administration expense Other expense Total expense DAVIDSON YACHTS COMPANY Comparative Statement of Income and Operating Cash Flow For the Years Ended December 31 2017 2018 2019 2020 $ 769,580 $ 726,878 $ 779,480 $ 931,478 38,779 36,045 40,734 46,398 475, 108 442,498 459, 215 546,978 $ 255,693 $ 248,335 $ 279,531 $ 338, 102 $ 29,115 $ 27, 498 $ 29,490 $ 35, 247 18,637 19,597 21,038 21,515 81,963 73,704 77,886 95,804 9,504 9,386 9,363 11,874 79,706 75, 274 80,733 96,509 12,670 18,967 15,803 22,943 $ 231,595 $ 224,426 $ 234,313 $ 283,892 2021 $ 766,610 33,287 454,869 $ 278, 454 $ 29,168 24,929 92,943 13,148 88,035 18,974 $ 267,197 2022 $ 950,857 47,780 531,797 $ 371,280 $ 40,120 29,033 | 101,487 11,420 | 97,481 22,702 $302,243 Net income $ 24,098 $ 23,909 $ 45,218 $ 54,210 $ 11,257 $ 69,037 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, 498 (3,527) (21,815) (1,040) (8,640) $ 16,385 $ 29,490 (10,471) (5,048) 3,830 (34,290) $ 28,729 $ 35,247 (10,358) (6,132) (2,022) (662) $ 70,283 $ 29,168 17,411 9,010 (7,797) (17,481) $ 41,568 $ 40,120 |(34,197) (37,820) | (4,020) 50,662 $ 83,782 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. 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. Valuation Method Valuation 1. 2. Net book value of equity Earnings multiple Operating cash flow multiple 3