Williams Company is a manufacturer of auto parts having the following financial statements for 20X1-20X2. Balance Sheet December 31 20X2 20X1 Cash $ 271,000 $ 146,000 Accounts receivable 161,000 236,000 Inventory 396,000 186,000 Total current assets $ 828,000 $ 568,000 Long-lived assets 1,750,000 1,610,000 Total assets $ 2,578,000 $ 2,178,000 Current liabilities 332,000 285,000 Long-term debt 900,000 910,000 Shareholders’ equity 1,346,000 983,000 Total debt and equity $ 2,578,000 $ 2,178,000 Income Statement For the years ended December 31 20X2 20X1 Sales $ 3,610,000 $ 3,710,000 Cost of sales 2,720,000 2,820,000 Gross margin 890,000 890,000 Operating expenses*footnote asterisk 511,000 329,000 Operating income 379,000 561,000 Taxes 151,600 196,350 Net income $ 227,400 $ 364,650 Cash Flow from Operations 20X2 20X1 Net income $ 227,400 $ 364,650 Plus depreciation expense 115,000 105,000 + Decrease (−increase) in accounts receivable and inventory (135,000) − + Increase (−decrease) in current liabilities 47,000 − Cash flow from operations $ 254,400 $ 469,650 *footnote asteriskOperating expenses include depreciation expense. Additional financial information, including industry averages for 20X2, where appropriate, includes: 20X2 20X1 Industry 20X2 Capital expenditures $ 104,400 $ 210,000 Income tax rate 40% 35% 35.0% Depreciation expense $ 115,000 $ 105,000 Dividends $ 39,000 $ 39,000 Year-end stock price $ 3.35 $ 4 25.00 Number of outstanding shares 1,910,000 1,910,000 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: Calculate free cash flow at Williams Company for each of the two years. Develop a business valuation for Williams Company for 20X2 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 20X2.

Williams Company is a manufacturer of auto parts having the following financial statements for 20X1-20X2. Balance Sheet December 31 20X2 20X1 Cash $ 271,000 $ 146,000 Accounts receivable 161,000 236,000 Inventory 396,000 186,000 Total current assets $ 828,000 $ 568,000 Long-lived assets 1,750,000 1,610,000 Total assets $ 2,578,000 $ 2,178,000 Current liabilities 332,000 285,000 Long-term debt 900,000 910,000 Shareholders’ equity 1,346,000 983,000 Total debt and equity $ 2,578,000 $ 2,178,000 Income Statement For the years ended December 31 20X2 20X1 Sales $ 3,610,000 $ 3,710,000 Cost of sales 2,720,000 2,820,000 Gross margin 890,000 890,000 Operating expensesfootnote asterisk 511,000 329,000 Operating income 379,000 561,000 Taxes 151,600 196,350 Net income $ 227,400 $ 364,650 Cash Flow from Operations 20X2 20X1 Net income $ 227,400 $ 364,650 Plus depreciation expense 115,000 105,000 + Decrease (−increase) in accounts receivable and inventory (135,000) − + Increase (−decrease) in current liabilities 47,000 − Cash flow from operations $ 254,400 $ 469,650 footnote asteriskOperating expenses include depreciation expense. Additional financial information, including industry averages for 20X2, where appropriate, includes: 20X2 20X1 Industry 20X2 Capital expenditures $ 104,400 $ 210,000 Income tax rate 40% 35% 35.0% Depreciation expense $ 115,000 $ 105,000 Dividends $ 39,000 $ 39,000 Year-end stock price $ 3.35 $ 4 25.00 Number of outstanding shares 1,910,000 1,910,000 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: Calculate free cash flow at Williams Company for each of the two years. Develop a business valuation for Williams Company for 20X2 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 20X2.

Survey of Accounting (Accounting I)

8th Edition

ISBN:9781305961883

Author:Carl Warren

Publisher:Carl Warren

Chapter9: Metric-analysis Of Financial Statements

Section: Chapter Questions

Problem 9.4.13P: Twenty metrics of liquidity, solvency, and profitability The comparative financial statements of...

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