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Brooks Plumbing Products Inc. (BPP) manufactures plumbing fixtures and other home improvement products that are sold...

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 $42 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 $ 80,099,778 $ 3,636,227
Accounts receivable 56,958,465 87,492,771
Inventory 39,845,416 60,081,645
Long-lived assets
Gross book value 167,458,377 143,958,377
Net book value 100,800,809 96,067,302
Replacement cost 170,767,409 188,645,338
Liquidation value 68,914,002 67,515,209
Current liabilities 119,225,766 121,193,274
Long-term debt 32,177,364 38,083,302
Shareholders’ equity 126,121,338 87,821,369
Capital expenditures 23,680,000 13,170,336
Sales 669,334,771 640,576,465
Cost of sales 499,557,788 478,391,001
Operating expense* 102,847,355 134,945,229
Income tax rate 36 % 36 % 36.00 %
Depreciation expense 18,946,493 15,844,254
Dividends 2,930,000 1,430,000
Year-end stock price $ 37.58 $ 24.79
Number of outstanding shares 27,489,554 24,563,554
Sales multiplier 1.40
Free cash flow multiplier 8.70
Earnings multiplier 13.50
Cost of capital 5.0 % 5.0 %
Accounts receivable turnover 5.30
Inventory turnover 8.50
Current ratio 1.90
Quick ratio 1.30
Cash flow ratio 1.40
Free cash flow ratio 1.30
Gross margin percentage 35.0 %
Return on assets (net book value) 20.0 %
Return on equity 28.0 %
Earnings per share $ 2.35

*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.)

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Answer #1

II . II . I P . . . . . . . . . . . . . . .. ..... .... .... 1. Valuation...of IIIIIII . . BPP..moof shares.com.dec.31% Stock* valuation of BPpCleanings) = Earning after tar.2010.x. Eaming 1 multiplice = 30,109,20.6.2012. X. 13:5.0. .4.2.4.,5.7.14,28Compute changes. Som.orking capital = .Particulars ...20.1.9. ... 2018...changy Cash. ..8.0.0.9.9,7.18. 36.36,21.1. Account R

negative free cash flow indicates an inability to generate enough cash to support business.

4.Valuation of bpp =free cash flow/capitalization rate

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