Question

Brooks Plumbing Products Inc. (BPP) manufactures plumbing fixtures and other home improvement products that are sold in Home Depot and Walmart as well as hardware stores. BPP has a solid reputation for providing value products, good quality, and a good price. The company has been approached by an investment banking firm representing a third company, Garden Specialties Inc. (GSI), that is interested in acquiring BPP. The acquiring firm (GSI) is a retailer of garden supplies; it sees the potential synergies of the combined firm and is willing to pay BPP shareholders $39 cash per share for their stock, which is greater than the current stock price; the stock has traded at about $34 in recent months. Summary financial information about BPP follows.

BROOKS PLUMBING PRODUCTS INC.
Selected Financial Information
For the Years Ended December 31
	2019			2018			2019 Industry Average
Cash	$	79,929,778		$	3,466,227
Accounts receivable		56,788,465			87,305,771
Inventory		39,675,416			59,894,645
Long-lived assets
Gross book value		167,288,377			143,788,377
Net book value		100,630,809			95,897,302
Replacement cost		170,597,409			188,475,338
Liquidation value		68,744,002			67,345,209
Current liabilities		119,055,766			121,006,274
Long-term debt		32,007,364			37,896,302
Shareholders’ equity		125,951,338			87,651,369
Capital expenditures		23,510,000			13,000,336
Sales		667,634,771			638,876,465
Cost of sales		498,707,788			477,541,001
Operating expense*		102,677,355			134,775,229
Income tax rate		35	%		35	%		35.00	%
Depreciation expense		18,776,493			15,674,254
Dividends		2,760,000			1,260,000
Year-end stock price	$	35.88		$	23.09
Number of outstanding shares		25,789,554			22,863,554
Sales multiplier								1.40
Free cash flow multiplier								8.50
Earnings multiplier								13.60
Cost of capital		5.3	%		5.3	%
Accounts receivable turnover								5.60
Inventory turnover								8.30
Current ratio								1.90
Quick ratio								1.20
Cash flow ratio								1.40
Free cash flow ratio								1.20
Gross margin percentage								34.0	%
Return on assets (net book value)								20.0	%
Return on equity								29.0	%
Earnings per share							$	2.33

*Operating expense includes depreciation expense.

Required:
1. What is the valuation of BPP (for 2019) using the market value method?

2. What is the valuation of BPP (for 2019) using the book value method?

3. What are the valuations of BPP (for 2019) using the multiples-based methods for sales, earnings, and free cash flow?

4. What is the estimated value for BPP using the discounted free cash flow method, assuming that the 2019 amount of free cash flow continues indefinitely?

5. Which of the methods would you use?

6. Is the GSI offer a good one?

(For requirements 1 to 4, round your answers to the nearest whole dollar amount.)

	1. Market value of equity method 2. Book value of equity method 3. Multiples-based method – Sales Multiples-based method – Earnings Multiples-based method – Free cash flow 4. Discounted cash flow method 5. Which of the methods would you use? 6. Is the GSI offer a good one?

Answer 1

Answer 1
Calculating valuation of BPP using Market value of equity method	Amount ($)
Number of Shares as on December 31	$25,789,554.00
Market price per share	$35.88
Valuation of BPP using Market value of equity method	$925,329,198.00
Answer 2
Calculating valuation of BPP using Book value of equity method
Shareholders equity as on Dececmber 31, 2019	$125,951,338.00
Answer 3 a)
Calculating valuation of BPP using Multiples-based method – Sales
Sales	$667,634,771.00
Sales multiplier	1.4
Valuation of BPP using Multiples-based method – Sales	$934,688,679.00
Answer 3 b)
Working Note :- Calculating Earnings After Tax For 2019
Sales	$667,634,771.00
Less:- Cost of sales	(498,707,788.00)
Less:- Operating expense (Including Depreciation)	(102,677,355.00)
Earnings before Taxes	66,249,628.00
Less:- Income tax @35%	(23,187,369.80)
Earnings After Tax	$43,062,258.20
Calculating valuation of BPP using Multiples-based method – Earnings
Earnings after Tax for 2019	$43,062,258.20
Earnings multiplier	13.6
Valuation of BPP using Multiples-based method – Earnings	$585,646,712.00

.

Answer 3 c)
Calculating valuation of BPP using Multiples-based method – Free cash flow
Step 1.
Calculating Change in Working Capital
Particulars	2019	2018	Change
Cash	$79,929,778.00	$3,466,227.00
Accounts Receivables	56788465.00	87305771.00
Inventory	39675416.00	59894645.00
Less:- Current Liabilities	-119055766.00	-121006274.00
Working Capital as on December 31.	$57,339,912.00	$29,662,387.00	$27,677,525.00

Increase in Working capital = 57339912 - 29662387 = $27677525

.

Step 2.
Calculating Free cash flows for 2019
Earnings After Tax           (Taken From Working Note.3b)	$43,062,258.20
Add:- Depreciation Expenses	18,776,493.00
Less: Change in Working Capital (Increase)	-27,677,525.00
Less:- Change in Capital Expenditure (Increase)	-23,510,000.00
Free Cash Flow for 2019	$10,651,226.20
Step 3.
Calculating Valuation of BPP using Multiples-based method – Free cash flow
Free Cash Flow for 2019	10651226.20
Free Cash Flow Multiplier	8.50
Valuation of BPP using Multiples-based method – Free cash flow	90535422.70
Valuation of BPP using Multiples-based method – Free cash flow (Rounded off)	$90,535,423.00

.

Answer 4

Answer 4

Calculating valuation of BPP using Discounted cash flow method (Perpetual Method)

=Free cash Flow/ Capitalization Rate

=10651226.20 / 5.30%

= $200,966,532

.

Summary Answer in table Format

Answer No.	Method of Valuation	Amount ($)
1	Market value of equity method	$925,329,198.00
2	Book value of equity method	$125,951,338.00
3 a)	Multiples-based method – Sales	$934,688,679.00
3 b)	Multiples-based method – Earnings	$585,646,712.00
3 c)	Multiples-based method – Free cash flow	$90,535,423.00
4	Discounted cash flow method	$200,966,532.00
5	Which of the methods would you use?	Market value of equity method
6	Is the GSI offer a good one?	Yes

.

Like The answer if it is helpful.