Question
Williams Company is a manufacturer of auto parts having the following financial statements for 2021-2022. Balance Sheet December 31 2022 2021 Cash $ 280,000 $
Williams Company is a manufacturer of auto parts having the following financial statements for 2021-2022.
| Balance Sheet | ||
| December 31 | ||
| 2022 | 2021 | |
|---|---|---|
| Cash | $ 280,000 | $ 155,000 |
| Accounts receivable | 170,000 | 245,000 |
| Inventory | 405,000 | 195,000 |
| Total current assets | $ 855,000 | $ 595,000 |
| Long-lived assets | 1,840,000 | 1,700,000 |
| Total assets | $ 2,695,000 | $ 2,295,000 |
| Current liabilities | 440,000 | 375,000 |
| Long-term debt | 900,000 | 1,000,000 |
| Shareholders equity | 1,355,000 | 920,000 |
| Total debt and equity | $ 2,695,000 | $ 2,295,000 |
| Income Statement | ||
| For the years ended December 31 | ||
| 2022 | 2021 | |
|---|---|---|
| Sales | $ 3,700,000 | $ 3,800,000 |
| Cost of sales | 2,900,000 | 3,000,000 |
| Gross margin | 800,000 | 800,000 |
| Operating expenses* | 520,000 | 230,000 |
| Operating income | 280,000 | 570,000 |
| Taxes | 98,000 | 199,500 |
| Net income | $ 182,000 | $ 370,500 |
| Cash Flow from Operations | ||
| 2022 | 2021 | |
|---|---|---|
| Net income | $ 182,000 | $ 370,500 |
| Plus depreciation expense | 160,000 | 150,000 |
| + Decrease (increase) in accounts receivable and inventory | (135,000) | |
| + Increase (decrease) in current liabilities | 65,000 | |
| Cash flow from operations | $ 272,000 | $ 520,500 |
*Operating expenses include depreciation expense.
Additional financial information, including industry averages for 2022, where appropriate, includes:
| 2022 | 2021 | Industry 2022 | |
|---|---|---|---|
| Capital expenditures | $ 165,000 | $ 300,000 | |
| Income tax rate | 35% | 35% | 35.0% |
| Depreciation expense | $ 160,000 | $ 150,000 | |
| Dividends | $ 30,000 | $ 30,000 | |
| Year-end stock price | $ 4.25 | $ 5 | 25.00 |
| Number of outstanding shares | 2,000,000 | 2,000,000 | |
| Sales multiplier | 1.50 | ||
| Free cash flow multiplier | 18.00 | ||
| Earnings multiplier | 9.00 | ||
| Cost of capital | 5% | 5% | |
| Accounts receivable turnover | 11.10 | ||
| Inventory turnover | 10.50 | ||
| Current ratio | 2.30 | ||
| Quick ratio | 1.90 | ||
| Cash flow from operations ratio | 1.20 | ||
| Free cash flow ratio | 1.10 | ||
| Gross margin percentage | 30.0% | ||
| Return on assets (net book value) | 20.0% | ||
| Return on equity | 30.0% |
Required:
Develop a business valuation for Williams Company for 2022 using the following methods: (1) book value of equity, (2) market value of equity, (3) discounted cash flow (DCF), (4) enterprise value, and (5) all the multiples-based valuations for which there is an industry average multiplier. For the calculation of the DCF valuation, you may use the simplifying assumption that free cash flows will continue indefinitely at the amount in 2022.
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Accounting Principles
Authors: Jerry J. Weygandt, Paul D. Kimmel, Donald E. Kieso
9th Edition
978-0470317549, 9780470387085, 047031754X, 470387084, 978-0470533475
