Sun Ray Boats

The family has decided to sell Sun Ray Boats as well due to the cyclical nature of the smaller boat manufacturing and sales business. The family is considering buying a boat manufacturing operation that builds much larger boats and is less cyclical. The following information was provided to AE relating to Sun Ray Boats for the last fiscal year.

Operating financial information:

	Fiscal year ended November 30, 2011
Revenues	$20 million
Cost of goods sold	$10 million
Selling, general and administrative expenses	$5 million
Income before taxes	$5 million
Allocated income taxes at 35%	$1.75 million
Net income	$3.25 million
Net after tax cash flow	$6 million
Boats sold in fiscal 2011	1,400

Balance sheet financial information:

	Fiscal year ended November 30, 2011
Total assets	$45 million
Total debt	$19 million
Total equity	$26 million
Latest fiscal year earnings	$3.25 million
Latest fiscal year return on equity	12.5%
Earnings per boat	$2,300

Sun Ray Boats has a good reputation in the industry and their construction has always been the best in the small boat leisure and fishing-class category. AE identified two private manufacturers similar in size that have changed hands within the last 18 months. These are Dolphin Boats and Key West Boats. Following is the financial information for these entities:

	Dolphin Boats	Key West Boats
Total assets	$ 35 million	$50 million
Total debt	$22.5 million	$25 million
Total equity	$12.5 million	$25 million
Latest fiscal year earnings	$1.5 million	$2.88 million
Fiscal year return on equity	12%	11.5%
Number of boats produced	1,000	1,600
Earnings per boat	$1,500	$1,800
Revenue in last fiscal year	$13 million	$31 million
Sales price of entity	$18 million (12 times earnings)	$31 million (11 times earnings)

AE also indicated that if you were to use a discounted cash flow analysis to estimate value, that a 20% discount rate should be used. Furthermore, they indicated that the growth factor for years two through five should be 3% with a 1% growth factor after that.

Required

Based on the above information about Sun Ray Boats and the comparable transactions, estimate the value of Sun Ray Boats. Apply:

Similar transaction method (consider the enhanced earnings capacity)

Discounted cash flow method (use the end-of-year convention)