Question

Williams Company is a manufacturer of auto parts having the following financial statements for 2018-2019.

Balance Sheet
December 31
	2019				2018
Cash	$	270,000			$	145,000
Accounts receivable		160,000				235,000
Inventory		395,000				185,000
Total current assets	$	825,000			$	565,000
Long-lived assets		1,740,000				1,600,000
Total assets	$	2,565,000			$	2,165,000
Current liabilities		320,000				275,000
Long-term debt		900,000				900,000
Shareholders’ equity		1,345,000				990,000
Total debt and equity	$	2,565,000			$	2,165,000

Income Statement
For the years ended December 31
	2019				2018
Sales	$	3,600,000			$	3,700,000
Cost of sales		2,700,000				2,800,000
Gross margin		900,000				900,000
Operating expenses*		510,000				340,000
Operating income		390,000				560,000
Taxes		136,500				196,000
Net income	$	253,500			$	364,000

Cash Flow from Operations
	2019				2018
Net income	$	253,500			$	364,000
Plus depreciation expense		110,000				100,000
+ Decrease (−increase) in accounts receivable and inventory		(135,000	)			−
+ Increase (−decrease) in current liabilities		45,000				−
Cash flow from operations	$	273,500			$	464,000

*Operating expenses include depreciation expense.

Additional financial information, including industry averages for 2019, where appropriate, includes:

	2019			2018			Industry 2019
Capital expenditures	$	95,000		$	200,000
Income tax rate		35	%		35	%	35.0	%
Depreciation expense	$	110,000		$	100,000
Dividends	$	40,000		$	40,000
Year-end stock price	$	3.25		$	4		25.00
Number of outstanding shares		1,900,000			1,900,000
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 2019 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 2019.

Answer 1

ANSWER

Answer-1:

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

=Total assets-(Current Liabilities +Long Term Debt)

=$2,565,000-($320,000+$920,000)

=$1,325,000

Answer-2:

Market Value of Equity = Total outstanding shares × Current stock price

=1,900,000 × $3.25

=$6,175,000

Answer-3:

Free Cash Flow =Net Income+Depreciation -Capital Expenditure -Change in Net Working Capital

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

=$253,500 + $110,000 - $95,000 - ($135,000 - $45,000)

=$178,000

Discounted Free Cash Flow =$178,000 × (1/1.05)

=$169,524

Answer-4:

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

=($6,175,000 + $900,000 - $270,000) / $273,500

=24.88

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