Brooks Plumbing Products Incorporated (BPP) manufactures plumbing fixtures and other home improvement products that are sold in Home Depot and Walmart as well as hardware stores. BPP has a solid reputation for providing value products, good quality, and a good price. The company has been approached by an investment banking firm representing a third company, Garden Specialties Incorporated (GSI), that is interested in acquiring BPP. The acquiring firm (GSI) is a retailer of garden supplies; it sees the potential synergies of the combined firm and is willing to pay BPP shareholders $37 cash per share for their stock, which is greater than the current stock price; the stock has traded at about $34 in recent months. Summary financial information about BPP follows. BROOKS PLUMBING PRODUCTS INCORPORATED Selected Financial Information For the Years Ended December 31 2022 Industry Average 2022 2021 Cash Accounts receivable Inventory $ 79,949,778 56,808,465 39,695,416 $ 3,486,227 87,327,771 59,916,645 167,308,377 143,808,377 100,650,809 95,917,302 170,617,409 188,495,338 68,764,002 Long-lived assets Gross book value Net book value Replacement cost Liquidation value Current liabilities Long-term debt Shareholders' equity Capital expenditures Sales 67,365,209 119,075,766 121,028,274 32,027,364 37,918,302 125,971,338 87,671,369 23,530,000 13,020,336 667,834,771 639,076,465 Cost of sales 498,807,788 477,641,001 Operating expense* 102,697,355 134,795,229 Income tax rate 18,796,493 Depreciation expense Dividends 2,780,000 15,694,254 1,280,000 $ 23.29 Year-end stock price $36.08 Number of outstanding shares 25,989,554 23,063,554 Sales multiplier Free cash flow multiplier Earnings multiplier Cost of capital 5.5% 5.5% Accounts receivable turnover Inventory turnover Current ratio Quick ratio Cash flow ratio Free cash flow ratio Gross margin percentage Return on assets (net book value) Return on equity Earnings per share *Operating expense includes depreciation expense. 38% 38% 38.00% 1.60 8.70 13.20 5.80 8.50 1.70 1.20 1.60 1.20 33.0% 18.0% 28.0% $ 2.35 Required: 1. What is the valuation of BPP (for 2022) using the market value method? 2. What is the valuation of BPP (for 2022) using the book value method? 3. What are the valuations of BPP (for 2022) using the multiples-based methods for sales, earnings, and free cash flow? 4. What is the estimated value for BPP using the discounted free cash flow method, assuming that the 2022 amount of free cash flow continues indefinitely? 5. Which of the methods would you use? 6. Is the GSI offer a good one? (For requirements 1 to 4, Intermediate calculations should be rounded, round your answers to the nearest whole dollar amount.) 1. Market value of equity method 2. Book value of equity method 3. Multiples-based method - Sales Multiples-based method - Earnings Multiples-based method - Free cash flow Discounted cash flow method Which of the methods would you use? Is the GSI offer a good one? 4. 5. 6
