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.)
negative free cash flow indicates an inability to generate enough cash to support business.
4.Valuation of bpp =free cash flow/capitalization rate
Brooks Plumbing Products Inc. (BPP) manufactures plumbing fixtures and other home improvement products that are sold...
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