Gordon Supply Company manufactures high quality gardening supplies for sale primarily to nursery and landscaping companies. Gordon Supply is a business that has continued to grow because of its commitment to quality and service to a relatively small number of large, loyal customers. The financial statements for Gordon for the most recent two years are shown below, together with selected industry information. 

Balance Sheet, Dec 31,
	2010	2009
Cash	$382,000	$200,000
Accounts receivable	90,000	120,000
Inventory	90,000	100,000
Total current assets	$ 562,000	$ 420,000
Long-lived assets	1,840,000	1,900,000
Total assets	$2,402,000	$2,320,000
Current liabilities	$200,000	$250,000
Long-term debt	650,000	650,000
Shareholder equity	1,552,000	1,420,000
Total debt and equity	$2,402,000	$2,320,000
Income Statement, for year ended Dec 31,
	2010	2009
Sales	$2,000,000	$1,800,000
Cost of sales	1,400,000	1,300,000
Gross margin	$ 600,000	$ 500,000
Operating expenses	400,000	350,000
Operating income	200,000	150,000
Taxes	68,000	51,000
Net income	$132,000	$99,000
Cash Flow from Operations
	2010	2009
Net income	$132,000	$99,000
Plus depreciation expense	60,000	50,000
+Decrease (-inc) in accounts receivable
and inventory	40,000	—
+Increase (-dec) in current liabilities	($50,000)	—
Cash Flow from Operations	$182,000	$149,000

Industry Benchmark
Information 2010
Sales multiplier .............. 2.50
Free cash flow multiplier ..........15.00
Earnings multiplier .............22.00
Accounts receivable turnover .........10.00
Inventory turnover .............12.00
Current ratio .............. 2.00
Quick ratio ................ 1.50
Cash flow from operations ratio ........ 1.20
Free cash flow ratio ............ 1.10
Gross margin percentage ..........30.0%
Return on assets (net book value) .......10.0%
Return on equity .............15.0%
Number of outstanding shares in both 2009 and 2010 is 1,650,000
Weighted average cost of capital for Gordon’s Supply is 5%
Year-end stock price, $3.00

Required
1. Calculate and interpret the liquidity, cash flow, and profitability ratios for Gordon’s Supply for 2009 and 2010. For simplicity, you may calculate the 2009 ratios with the assumption that receivables, inventory, and total assets are the same in 2009 as 2008.
2. Develop a business valuation for Gordon Supply Company for 2010 using the following methods: (a) book value of equity, (b) market value of equity, (c) discounted cash flow (DCF), (d) enterprise value, and (e) 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 in2010.

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Required 1. Calculate and interpret the li quidity, cash flow, and profitability ratios for Gordon's Supply for 2009 and 2010. For simplicity, you may calculate the 2009 ratios with the assumption that receivables, inventory, and total assets are the sam e in 2009 as 2008. 2. Develop a business valuation for Gordon Supply Company for 2010 using the following methods (a) Book value of equity (b) Market value of equity (c) Discounted cash flow (DCF) (d) Enterpri se value e) All the multiples-based valuati ons 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 am ount in 2010