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.

FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
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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 balance sheet and income statement for Davidson Yachts for 2017 to 2022 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.

 

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
Accounts receivable 99,865 103,274 113,383 126,183 104,788 144,409
Allowance for bad debts (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
Accumulated depreciation (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 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
Valuation
1.
Net book value of equity
2.
Earnings multiple
3.
Operating cash flow multiple
Transcribed Image Text:Valuation Method Valuation 1. Net book value of equity 2. Earnings multiple 3. Operating cash flow multiple
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