Davidson Yachts is a small private 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.
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Davidson Yachts is a small private 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 140 to 190 sailboats each year, ranging from 16-foot dinghies to 22-foot sailboats. Their sales prices range from $2,400 to more than $10,400. 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
| DAVIDSON YACHTS COMPANY | ||||||
| Comparative Balance Sheet | ||||||
| December 31 | ||||||
| 2017 | 2018 | 2019 | 2020 | 2021 | 2022 | |
|---|---|---|---|---|---|---|
| Cash | $ 23,660 | $ 22,366 | $ 19,135 | $ 28,826 | $ 44,092 | $31,664 |
| 99,865 | 103,274 | 113,383 | 126,183 | 104,788 | 144,409 | |
| Allowance for |
(9,504) | (9,386) | (9,024) | (11,466) | (7,482) | (12,906) |
| Inventory | 35,409 | 57,224 | 62,272 | 68,404 | 59,394 | 97,214 |
| Other current assets | 12,294 | 13,334 | 9,504 | 11,526 | 19,323 | 23,343 |
| Total current assets | $ 161,724 | $ 186,812 | $ 195,270 | $ 223,473 | $ 220,115 | $283,724 |
| Property and equipment | 262,595 | 282,408 | 299,780 | 368,965 | 405,669 | 499,026 |
| (66,384) | (93,842) | (123,292) | (158,499) | (187,627) | (227,707) | |
| Total assets | $ 357,935 | $ 375,378 | $ 371,758 | $ 433,939 | $ 438,157 | $555,043 |
| Accounts payable | $ 83,035 | $ 78,567 | $ 63,826 | $ 56,776 | $ 40,589 | $50,984 |
| Taxes payable | 12,030 | 11,383 | 12,180 | 14,483 | 4,138 | 16,532 |
| Short-term loans | 60,276 | 57,380 | 37,983 | 41,493 | 49,994 | 77,362 |
| Accrued payroll payable | 5,627 | 4,998 | 4,049 | 4,624 | 5,174 | 5,679 |
| Total current liabilities | $ 160,968 | $ 152,328 | $ 118,038 | $ 117,376 | $ 99,895 | $ 150,557 |
| Long-term debt | 158,573 | 172,788 | 179,890 | 215,397 | 229,871 | 262,658 |
| Equity | 38,394 | 50,262 | 73,830 | 101,166 | 108,391 | 141,828 |
| Total liabilities and equity | $ 357,935 | $ 375,378 | $ 371,758 | $ 433,939 | $ 438,157 | $ 555,043 |
| DAVIDSON YACHTS COMPANY | ||||||
| Comparative Statement of Income and Operating Cash Flow | ||||||
| For the Years Ended December 31 | ||||||
| 2017 | 2018 | 2019 | 2020 | 2021 | 2022 | |
|---|---|---|---|---|---|---|
| Sales | $ 769,580 | $ 726,878 | $ 779,480 | $ 931,478 | $ 766,610 | $ 950,857 |
| Returns and allowances | 38,779 | 36,045 | 40,734 | 46,398 | 33,287 | 47,780 |
| Cost of sales | 475,108 | 442,498 | 459,215 | 546,978 | 454,869 | 531,797 |
| Gross margin | $ 255,693 | $ 248,335 | $ 279,531 | $ 338,102 | $ 278,454 | $ 371,280 |
| Depreciation expense | $ 29,115 | $ 27,498 | $ 29,490 | $ 35,247 | $ 29,168 | $ 40,120 |
| Interest expense | 18,637 | 19,597 | 21,038 | 21,515 | 24,929 | 29,033 |
| Salaries and wages | 81,963 | 73,704 | 77,886 | 95,804 | 92,943 | 101,487 |
| Accounting and legal | 9,504 | 9,386 | 9,363 | 11,874 | 13,148 | 11,420 |
| Administration expense | 79,706 | 75,274 | 80,733 | 96,509 | 88,035 | 97,481 |
| Other expense | 12,670 | 18,967 | 15,803 | 22,943 | 18,974 | 22,702 |
| Total expense | $ 231,595 | $ 224,426 | $ 234,313 | $ 283,892 | $ 267,197 | $ 302,243 |
| Net income | $ 24,098 | $ 23,909 | $ 45,218 | $ 54,210 | $ 11,257 | $ 69,037 |
| Cash flow from operations (adjustments to net income) | ||||||
| Depreciation | $ 27,498 | $ 29,490 | $ 35,247 | $ 29,168 | $ 40,120 | |
| Decrease (increase) in receivables | (3,527) | (10,471) | (10,358) | 17,411 | (34,197) | |
| Decrease (increase) in inventory | (21,815) | (5,048) | (6,132) | 9,010 | (37,820) | |
| Decrease (increase) in other current assets | (1,040) | 3,830 | (2,022) | (7,797) | (4,020) | |
| Increase (decrease) in current liabilities | (8,640) | (34,290) | (662) | (17,481) | 50,662 | |
| $ 16,385 | $ 28,729 | $ 70,283 | $ 41,568 | $ 83,782 |
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
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.
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