Williams Company is a manufacturer of auto parts having the following financial statements for 2021-2022. Balance Sheet December 31 2022 2021 Cash $ 276,000 $ 151,000 Accounts receivable 166,000 241,000 Inventory 401,000 191,000 Total current assets $ 843,000 $ 583,000 Long-lived assets 1,800,000 1,660,000 Total assets $ 2,643,000 $ 2,243,000 Current liabilities 392,000 335,000 Long-term debt 900,000 960,000 Shareholders’ equity 1,351,000 948,000 Total debt and equity $ 2,643,000 $ 2,243,000 Income Statement For the years ended December 31 2022 2021 Sales $ 3,660,000 $ 3,760,000 Cost of sales 2,820,000 2,920,000 Gross margin 840,000 840,000 Operating expenses* 516,000 274,000 Operating income 324,000 566,000 Taxes 113,400 198,100 Net income $ 210,600 $ 367,900 Cash Flow from Operations 2022 2021 Net income $ 210,600 $ 367,900 Plus depreciation expense 140,000 130,000 + Decrease (−increase) in accounts receivable and inventory (135,000) − + Increase (−decrease) in current liabilities 57,000 − Cash flow from operations $ 272,600 $ 497,900 *Operating expenses include depreciation expense. Additional financial information, including industry averages for 2022, where appropriate, includes: 2022 2021 Industry 2022 Capital expenditures $ 170,000 $ 260,000 Income tax rate 35% 35% 35.0% Depreciation expense $ 140,000 $ 130,000 Dividends $ 34,000 $ 34,000 Year-end stock price $ 3.85 $ 4 25.00 Number of outstanding shares 1,960,000 1,960,000 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.

Williams Company is a manufacturer of auto parts having the following financial statements for 2021-2022. Balance Sheet December 31 2022 2021 Cash $ 276,000 $ 151,000 Accounts receivable 166,000 241,000 Inventory 401,000 191,000 Total current assets $ 843,000 $ 583,000 Long-lived assets 1,800,000 1,660,000 Total assets $ 2,643,000 $ 2,243,000 Current liabilities 392,000 335,000 Long-term debt 900,000 960,000 Shareholders’ equity 1,351,000 948,000 Total debt and equity $ 2,643,000 $ 2,243,000 Income Statement For the years ended December 31 2022 2021 Sales $ 3,660,000 $ 3,760,000 Cost of sales 2,820,000 2,920,000 Gross margin 840,000 840,000 Operating expenses* 516,000 274,000 Operating income 324,000 566,000 Taxes 113,400 198,100 Net income $ 210,600 $ 367,900 Cash Flow from Operations 2022 2021 Net income $ 210,600 $ 367,900 Plus depreciation expense 140,000 130,000 + Decrease (−increase) in accounts receivable and inventory (135,000) − + Increase (−decrease) in current liabilities 57,000 − Cash flow from operations $ 272,600 $ 497,900 *Operating expenses include depreciation expense. Additional financial information, including industry averages for 2022, where appropriate, includes: 2022 2021 Industry 2022 Capital expenditures $ 170,000 $ 260,000 Income tax rate 35% 35% 35.0% Depreciation expense $ 140,000 $ 130,000 Dividends $ 34,000 $ 34,000 Year-end stock price $ 3.85 $ 4 25.00 Number of outstanding shares 1,960,000 1,960,000 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.

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter8: Basic Stock Valuation

Section: Chapter Questions

Problem 4Q: Explain how to use the free cash flow valuation model to find the price per share of common equity.

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Question

Williams Company is a manufacturer of auto parts having the following financial statements for 2021-2022.

	2022	2021
Balance Sheet
December 31
Cash	$ 276,000	$ 151,000
Accounts receivable	166,000	241,000
Inventory	401,000	191,000
Total current assets	$ 843,000	$ 583,000
Long-lived assets	1,800,000	1,660,000
Total assets	$ 2,643,000	$ 2,243,000
Current liabilities	392,000	335,000
Long-term debt	900,000	960,000
Shareholders’ equity	1,351,000	948,000
Total debt and equity	$ 2,643,000	$ 2,243,000

	2022	2021
Income Statement
For the years ended December 31
Sales	$ 3,660,000	$ 3,760,000
Cost of sales	2,820,000	2,920,000
Gross margin	840,000	840,000
Operating expenses*	516,000	274,000
Operating income	324,000	566,000
Taxes	113,400	198,100
Net income	$ 210,600	$ 367,900

	2022	2021
Cash Flow from Operations
Net income	$ 210,600	$ 367,900
Plus depreciation expense	140,000	130,000
+ Decrease (−increase) in accounts receivable and inventory	(135,000)	−
+ Increase (−decrease) in current liabilities	57,000	−
Cash flow from operations	$ 272,600	$ 497,900

*Operating expenses include depreciation expense.

Additional financial information, including industry averages for 2022, where appropriate, includes:

	2022	2021	Industry 2022
Capital expenditures	$ 170,000	$ 260,000
Income tax rate	35%	35%	35.0%
Depreciation expense	$ 140,000	$ 130,000
Dividends	$ 34,000	$ 34,000
Year-end stock price	$ 3.85	$ 4	25.00
Number of outstanding shares	1,960,000	1,960,000
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.

Book value of equity
Market value of equity
Discounted free cash flows
Enterprise value
Multiples-based valuation
Earnings multiple
Free cash flow multiple
Sales multiple

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