Williams Company is a manufacturer of auto parts having the following financial statements for 2016.
Balance Sheet December 31, 2016 2016 Cash $ 280,000 Accounts receivable 170,000 Inventory 405,000 Total current assets $ 855,000 Long-lived assets 1,840,000 Total assets $ 2,695,000 Current liabilities 420,000 Long-term debt 920,000 Shareholder equity 1,355,000 Total debt and equity $ 2,695,000
Income Statement For the years ended December 31, 2016 2016 Sales $ 3,700,000 Cost of sales 2,900,000 Gross margin 800,000 Operating expenses* 520,000 Operating income 280,000 Taxes 98,000 Net income $ 182,000
Cash Flow from Operations 2016 Net income $ 182,000 Plus depreciation expense 160,000 +Decrease (-inc) in Accounts receivable and Inventory (155,000 ) +Increase (-dec) in Current liabilities 125,000 Cash flow from operations $ 312,000
*Operating expenses include depreciation expense.
Additional financial information, including industry averages for 2016, where appropriate includes:
2016 Industry 2016 Capital expenditures $ 165,000 Income tax rate 35 % 35.0 % Depreciation expense $ 160,000 Dividends $ 30,000 Year-end stock price $ 4.25 25.00 Number of outstanding shares 2,000,000 Sales multiplier 1.50 Free cash flow multiplier 18.00 Earnings multiplier 9.00 Cost of capital 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 2016 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 2016.
| Williams Company is a manufacturer of auto parts having the following financial statements for 2016. |
| Balance Sheet | ||
| December 31, 2016 | ||
| 2016 | ||
| Cash | $ | 280,000 |
| Accounts receivable | 170,000 | |
| Inventory | 405,000 | |
| Total current assets | $ | 855,000 |
| Long-lived assets | 1,840,000 | |
| Total assets | $ | 2,695,000 |
| Current liabilities | 420,000 | |
| Long-term debt | 920,000 | |
| Shareholder equity | 1,355,000 | |
| Total debt and equity | $ | 2,695,000 |
| Income Statement | ||
| For the years ended December 31, 2016 | ||
| 2016 | ||
| Sales | $ | 3,700,000 |
| Cost of sales | 2,900,000 | |
| Gross margin | 800,000 | |
| Operating expenses* | 520,000 | |
| Operating income | 280,000 | |
| Taxes | 98,000 | |
| Net income | $ | 182,000 |
| Cash Flow from Operations | |||||
| 2016 | |||||
| Net income | $ | 182,000 | |||
| Plus depreciation expense | 160,000 | ||||
| +Decrease (-inc) in Accounts receivable and Inventory | (155,000 | ) | |||
| +Increase (-dec) in Current liabilities | 125,000 | ||||
| Cash flow from operations | $ | 312,000 | |||
| *Operating expenses include depreciation expense. |
| Additional financial information, including industry averages for 2016, where appropriate includes: |
| 2016 | Industry 2016 | |||||||
| Capital expenditures | $ | 165,000 | ||||||
| Income tax rate | 35 | % | 35.0 | % | ||||
| Depreciation expense | $ | 160,000 | ||||||
| Dividends | $ | 30,000 | ||||||
| Year-end stock price | $ | 4.25 | 25.00 | |||||
| Number of outstanding shares | 2,000,000 | |||||||
| Sales multiplier | 1.50 | |||||||
| Free cash flow multiplier | 18.00 | |||||||
| Earnings multiplier | 9.00 | |||||||
| Cost of capital | 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 2016 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 2016. |
Related questions
The comparative financial statements of Bettancort Inc. are as follows. The market price of Bettancort Inc. common stock was $71.25 on December 31, 2016.
| Bettancort Inc. | ||||||
| Comparative Retained Earnings Statement | ||||||
| For the Years Ended December 31, 2016 and 2015 | ||||||
| 2016 | 2015 | |||||
| Retained earnings, January 1 | $2,655,000 | $2,400,000 | ||||
| Add net income for year | 300,000 | 280,000 | ||||
| Total | $2,955,000 | $2,680,000 | ||||
| Deduct dividends: | ||||||
| On preferred stock | $15,000 | $15,000 | ||||
| On common stock | 10,000 | 10,000 | ||||
| Total | $25,000 | $25,000 | ||||
| Retained earnings, December 31 | $2,930,000 | $2,655,000 | ||||
| Bettancort Inc. | ||||
| Comparative Income Statement | ||||
| For the Years Ended December 31, 2016 and 2015 | ||||
| 2016 | 2015 | |||
| Sales (all on account) | $1,212,000 | $1,010,000 | ||
| Sales returns and allowances | 12,000 | 10,000 | ||
| Sales | $1,200,000 | $1,000,000 | ||
| Cost of goods sold | 500,000 | 475,000 | ||
| Gross profit | $700,000 | $525,000 | ||
| Selling expenses | $240,000 | $200,000 | ||
| Administrative expenses | 180,000 | 150,000 | ||
| Total operating expenses | $420,000 | $350,000 | ||
| Income from operations | $280,000 | $175,000 | ||
| Other income | 166,000 | 225,000 | ||
| $446,000 | $400,000 | |||
| Other expense (interest) | 66,000 | 60,000 | ||
| Income before income tax | $380,000 | $340,000 | ||
| Income tax expense | 80,000 | 60,000 | ||
| Net income | $300,000 | $280,000 | ||
| Bettancort Inc. | |||||||
| Comparative Balance Sheet | |||||||
| December 31, 2016 and 2015 | |||||||
| Dec. 31, 2016 | Dec. 31, 2015 | ||||||
| Assets | |||||||
| Current assets: | |||||||
| Cash | $450,000 | $400,000 | |||||
| Marketable securities | 300,000 | 260,000 | |||||
| Accounts receivable (net) | 130,000 | 110,000 | |||||
| Inventories | 67,000 | 58,000 | |||||
| Prepaid expenses | 153,000 | 139,000 | |||||
| Total current assets | $1,100,000 | $967,000 | |||||
| Long-term investments | 2,350,000 | 2,200,000 | |||||
| Property, plant, and equipment (net) | 1,320,000 | 1,188,000 | |||||
| Total assets | $4,770,000 | $4,355,000 | |||||
| Liabilities | |||||||
| Current liabilities | $440,000 | $400,000 | |||||
| Long-term liabilities: | |||||||
| Mortgage note payable, 8%, due 2021 | $100,000 | $0 | |||||
| Bonds payable, 5%, due 2017 | 1,000,000 | 1,000,000 | |||||
| Total long-term liabilities | $1,100,000 | $1,000,000 | |||||
| Total liabilities | $1,540,000 | $1,400,000 | |||||
| Stockholders' Equity | |||||||
| Preferred $0.75 stock, $10 par | $200,000 | $200,000 | |||||
| Common stock, $10 par | 100,000 | 100,000 | |||||
| Retained earnings | 2,930,000 | 2,655,000 | |||||
| Total stockholders' equity | $3,230,000 | $2,955,000 | |||||
| Total liabilities and stockholders' equity | $4,770,000 | $4,355,000 | |||||
Required:
Determine the following measures for 2016, rounding to one decimal place, except for dollar amounts, which should be rounded to the nearest cent. Use the rounded answer of the requirement for subsequent requirement, if required. Assume 365 days a year.
| 1. Working capital | $ | |
| 2. Current ratio | ||
| 3. Quick ratio | ||
| 4. Accounts receivable turnover | ||
| 5. Number of days' sales in receivables | days | |
| 6. Inventory turnover | ||
| 7. Number of days' sales in inventory | days | |
| 8. Ratio of fixed assets to long-term liabilities | ||
| 9. Ratio of liabilities to stockholders' equity | ||
| 10. Number of times interest charges are earned | ||
| 11. Number of times preferred dividends are earned | ||
| 12. Ratio of sales to assets | ||
| 13. Rate earned on total assets | % | |
| 14. Rate earned on stockholders' equity | % | |
| 15. Rate earned on common stockholders' equity | % | |
| 16. Earnings per share on common stock | $ | |
| 17. Price-earnings ratio | ||
| 18. Dividends per share of common stock | $ | |
| 19. Dividend yield | % |
The comparative financial statements of Bettancort Inc. are as follows. The market price of Bettancort Inc. common stock was $71.25 on December 31, 2016.
| Bettancort Inc. | ||||||
| Comparative Retained Earnings Statement | ||||||
| For the Years Ended December 31, 2016 and 2015 | ||||||
| 2016 | 2015 | |||||
| Retained earnings, January 1 | $2,655,000 | $2,400,000 | ||||
| Add net income for year | 300,000 | 280,000 | ||||
| Total | $2,955,000 | $2,680,000 | ||||
| Deduct dividends: | ||||||
| On preferred stock | $15,000 | $15,000 | ||||
| On common stock | 10,000 | 10,000 | ||||
| Total | $25,000 | $25,000 | ||||
| Retained earnings, December 31 | $2,930,000 | $2,655,000 | ||||
| Bettancort Inc. | ||||
| Comparative Income Statement | ||||
| For the Years Ended December 31, 2016 and 2015 | ||||
| 2016 | 2015 | |||
| Sales (all on account) | $1,212,000 | $1,010,000 | ||
| Sales returns and allowances | 12,000 | 10,000 | ||
| Sales | $1,200,000 | $1,000,000 | ||
| Cost of goods sold | 500,000 | 475,000 | ||
| Gross profit | $700,000 | $525,000 | ||
| Selling expenses | $240,000 | $200,000 | ||
| Administrative expenses | 180,000 | 150,000 | ||
| Total operating expenses | $420,000 | $350,000 | ||
| Income from operations | $280,000 | $175,000 | ||
| Other income | 166,000 | 225,000 | ||
| $446,000 | $400,000 | |||
| Other expense (interest) | 66,000 | 60,000 | ||
| Income before income tax | $380,000 | $340,000 | ||
| Income tax expense | 80,000 | 60,000 | ||
| Net income | $300,000 | $280,000 | ||
| Bettancort Inc. | |||||||
| Comparative Balance Sheet | |||||||
| December 31, 2016 and 2015 | |||||||
| Dec. 31, 2016 | Dec. 31, 2015 | ||||||
| Assets | |||||||
| Current assets: | |||||||
| Cash | $450,000 | $400,000 | |||||
| Marketable securities | 300,000 | 260,000 | |||||
| Accounts receivable (net) | 130,000 | 110,000 | |||||
| Inventories | 67,000 | 58,000 | |||||
| Prepaid expenses | 153,000 | 139,000 | |||||
| Total current assets | $1,100,000 | $967,000 | |||||
| Long-term investments | 2,350,000 | 2,200,000 | |||||
| Property, plant, and equipment (net) | 1,320,000 | 1,188,000 | |||||
| Total assets | $4,770,000 | $4,355,000 | |||||
| Liabilities | |||||||
| Current liabilities | $440,000 | $400,000 | |||||
| Long-term liabilities: | |||||||
| Mortgage note payable, 8%, due 2021 | $100,000 | $0 | |||||
| Bonds payable, 5%, due 2017 | 1,000,000 | 1,000,000 | |||||
| Total long-term liabilities | $1,100,000 | $1,000,000 | |||||
| Total liabilities | $1,540,000 | $1,400,000 | |||||
| Stockholders' Equity | |||||||
| Preferred $0.75 stock, $10 par | $200,000 | $200,000 | |||||
| Common stock, $10 par | 100,000 | 100,000 | |||||
| Retained earnings | 2,930,000 | 2,655,000 | |||||
| Total stockholders' equity | $3,230,000 | $2,955,000 | |||||
| Total liabilities and stockholders' equity | $4,770,000 | $4,355,000 | |||||
Required:
Determine the following measures for 2016, rounding to one decimal place, except for dollar amounts, which should be rounded to the nearest cent. Use the rounded answer of the requirement for subsequent requirement, if required. Assume 365 days a year.
| 5. Number of days' sales in receivables | days | |
| 6. Inventory turnover | ||
| 7. Number of days' sales in inventory | days | |
| 8. Ratio of fixed assets to long-term liabilities | ||
| 9. Ratio of liabilities to stockholders' equity | ||
| 10. Number of times interest charges are earned | ||
| 11. Number of times preferred dividends are earned | ||
| 12. Ratio of sales to assets | ||
| 13. Rate earned on total assets | % | |
| 14. Rate earned on stockholders' equity | % | |
| 15. Rate earned on common stockholders' equity | % | |
| 16. Earnings per share on common stock | $ | |
| 17. Price-earnings ratio | ||
| 18. Dividends per share of common stock | $ | |
| 19. Dividend yield | % |
