Davidson Yachts is a small company founded by two businesspeople who are friends and avid sailors....

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Davidson Yachts is a small 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 210 to 260 sailboats each year, ranging from 14-foot dinghies to 20-foot sailboats. Their sales prices range from $3,600 to more than $11,600. 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 2014-2019 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 Total assets Accounts payable Taxes payable Short-term loans Accrued payroll payable Total current liabilities Long-term debt Equity Total liabilities and equity DAVIDSON YACHTS COMPANY Comparative Balance Sheet 2014 $ 24,860 101,065 (10,104) 36,609 13,494 December 31 2015 $ 23,566 104,594 2016 $ 20,335 2017 $ 30,026 2018 $ 45,292 2019 $ 32,864 (11,186) 58,544 14,654 $190,172 283,608 (95,042) $378,738 $ 79,887 12,583 114,823 (9,624) 63,712 10,944 $ 200,190 300,980 (124,492) $ 376,678 $ 65,266 127,743 (12,066) 69,964 13,086 $ 228,753 370,165 (159,699) $ 439,219 $ 58,336 15,683 105,988 (8,082) 60,594 20,523 $ 224,315 406,869 (188,827) $ 442,357 $ 41,789 5,338 51,194 6,374 $165,924 263,795 (67,584) $362,135 $ 84,235 13,230 61,476 58,580 6,827 6,198 $165,768 $157,248 159,773 36,594 $362,135 173,988 47,502 $378,738 $ 123,078 181,090 72,510 $ 122,536 216,597 100,086 $ 376,678 $ 439,219 $ 442,357 13,380 39,183 5,249 42,693 5,824 $ 104,695 231,071 106,591 145,609 (14,106) 98,534 24,663 $ 287,564 500,226 (228,907) $ 558,883 $ 52,304 17,732 78,562 6,879 $ 155,477 263,858 139,548 $ 558,883 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 2014 $775,580 2015 $732,878 39,979 478,708 37,245 446,098 2016 $785,480 41,934 462,815 2017 $937,478 47,598 550,578 2018 772,610 34,487 2019 956,857 48,980 458,469 535,397 $249,535 $280,731 $339,302 $279,654 $372,480 18,757 19,717 21,158 $256,893 $ 29,235 $ 27,618 $ 29,610 $ 35,367 $ 29,288 $ 40,240 29,153 21,635 25,049 82,083 73,824 78,006 95,924 93,063 101,607 10,104 11,186 9,483 11,994 13,268 11,540 79,826 75,394 80,853 96,629 88,155 97,601 12,790 19,087 15,923 23,063 19,094 22,822 $232,795 $226,826 $235,033 $284,612 $267,917 $302,963 Net income 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 $ 24,098 $ 22,709 $ 45,698 $ 54,690 $ 27,618 $ 29,610 $ 35,367 (2,447) (21,935) (1,160) (8,520) $ 16,265 (11,791) (5,168) 3,710 (34,170) $ 27,889 $ 70,643 (6,252) (2,142) (542) (7,437) (17,841) (10,478) $ 11,737 $ 29,288 17,771 9,370 $ 69,517 $ 40,240 (33,597) (37,940) (4,140) 50,782 $ 42,888 $ 84,862 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 1. Net book value of equity 2. Earnings multiple 3. Operating cash flow multiple Valuation Davidson Yachts is a small 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 210 to 260 sailboats each year, ranging from 14-foot dinghies to 20-foot sailboats. Their sales prices range from $3,600 to more than $11,600. 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 2014-2019 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 Total assets Accounts payable Taxes payable Short-term loans Accrued payroll payable Total current liabilities Long-term debt Equity Total liabilities and equity DAVIDSON YACHTS COMPANY Comparative Balance Sheet 2014 $ 24,860 101,065 (10,104) 36,609 13,494 December 31 2015 $ 23,566 104,594 2016 $ 20,335 2017 $ 30,026 2018 $ 45,292 2019 $ 32,864 (11,186) 58,544 14,654 $190,172 283,608 (95,042) $378,738 $ 79,887 12,583 114,823 (9,624) 63,712 10,944 $ 200,190 300,980 (124,492) $ 376,678 $ 65,266 127,743 (12,066) 69,964 13,086 $ 228,753 370,165 (159,699) $ 439,219 $ 58,336 15,683 105,988 (8,082) 60,594 20,523 $ 224,315 406,869 (188,827) $ 442,357 $ 41,789 5,338 51,194 6,374 $165,924 263,795 (67,584) $362,135 $ 84,235 13,230 61,476 58,580 6,827 6,198 $165,768 $157,248 159,773 36,594 $362,135 173,988 47,502 $378,738 $ 123,078 181,090 72,510 $ 122,536 216,597 100,086 $ 376,678 $ 439,219 $ 442,357 13,380 39,183 5,249 42,693 5,824 $ 104,695 231,071 106,591 145,609 (14,106) 98,534 24,663 $ 287,564 500,226 (228,907) $ 558,883 $ 52,304 17,732 78,562 6,879 $ 155,477 263,858 139,548 $ 558,883 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 2014 $775,580 2015 $732,878 39,979 478,708 37,245 446,098 2016 $785,480 41,934 462,815 2017 $937,478 47,598 550,578 2018 772,610 34,487 2019 956,857 48,980 458,469 535,397 $249,535 $280,731 $339,302 $279,654 $372,480 18,757 19,717 21,158 $256,893 $ 29,235 $ 27,618 $ 29,610 $ 35,367 $ 29,288 $ 40,240 29,153 21,635 25,049 82,083 73,824 78,006 95,924 93,063 101,607 10,104 11,186 9,483 11,994 13,268 11,540 79,826 75,394 80,853 96,629 88,155 97,601 12,790 19,087 15,923 23,063 19,094 22,822 $232,795 $226,826 $235,033 $284,612 $267,917 $302,963 Net income 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 $ 24,098 $ 22,709 $ 45,698 $ 54,690 $ 27,618 $ 29,610 $ 35,367 (2,447) (21,935) (1,160) (8,520) $ 16,265 (11,791) (5,168) 3,710 (34,170) $ 27,889 $ 70,643 (6,252) (2,142) (542) (7,437) (17,841) (10,478) $ 11,737 $ 29,288 17,771 9,370 $ 69,517 $ 40,240 (33,597) (37,940) (4,140) 50,782 $ 42,888 $ 84,862 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 1. Net book value of equity 2. Earnings multiple 3. Operating cash flow multiple Valuation

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