Question

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.

Answer 1

The following methods of valuation are explained below ;

1.Book Value of Equity =Total Assets-Total Liabilities (Excluding Equity)

                                  =$2695000-(Current Liabilities +Long Term Debt)

                                  =$2695000-($420000+$920000)

                                  =$1355000

So in a broader sense it can be interpreted that if Williams Company sold off its assets and pays down its liabilities the equity value or net worth of the business would be $1355000.The return on equity is much lesser as compared to the industry standard of 30% which is 13.43%

2.Market Value of Equity is the total dollar value of a company equity calculated by multiplying the current stock price by total outstanding shares.A company market value therefore constantly changes based on these two variables.

                                       =2,000,000 *$4.25

                                       =$85000000

   3.Free Cash Flow =Net Income+Depreciation -Capital Expenditure -Change in NWC

                             =Net Income + Depreciation -Capital Expenditure -(Increase in Accounts Receivable -Increase in Current Liabilities)

                              =$182000+$160000-$165000-($155000-$125000)

                              =$147000

Discounted Free Cash Flow =$147000/(1/1.05)

                                         =$140000

4.Enterprise Value =It is ratio of the entire economic value of a company to the cash it produces

                           =(Market Capitalization +Total Debt -Cash)/Cash From Operations

                           =(2,000,000 *$4.25+$920000-$280000)/$312000

                           =($85000000+$920000-$280000)/$312000

                           =274.5