Business Analysis and Business Valuation Gordon Supply Company manufactures high quality gardening supplies for sale primarily to nursery and landscaping companies. Gordon Supply is a business that has continued to grow because of its commitment to quality and service to a relatively small number of large, loyal customers. The financial statements for Gordon for the most recent two years are shown below, together with selected industry information.
Balance Sheet, Dec 31, | ||
| 2010 | 2009 |
Cash | $ 382,000 | $ 200,000 |
Accounts receivable | 90,000 | 120,000 |
Inventory | 90,000 | 100,000 |
Total current assets | 562,000 | 420,000 |
Long-lived assets | 1,840,000 | 1,900,000 |
Total assets | $2,402,000 | $2,320,000 |
Current liabilities | $ 200,000 | $ 250,000 |
Long-term debt | 650,000 | 650,000 |
Shareholders’ equity | 1,552,000 | 1,420,000 |
Total debt and equity | $2,402,000 | $2,320,000 |
Income Statement, for year ended Dec 31, | ||
| 2010 | 2009 |
Sales | $2,000,000 | $1,800,000 |
Cost of sales | 1,400,000 | 1,300,000 |
Gross margin | 600,000 | 500,000 |
Operating expense | 400,000 | 350,000 |
Operating income | 200,000 | 150,000 |
Tax expense | 68,000 | 51,000 |
Net income | $ 132,000 | $ 99,000 |
Cash Flow from Operations | ||
| 2010 | 2009 |
Net income | $132,000 | $ 99,000 |
Plus depreciation expense | 60,000 | 50,000 |
+Decrease (-inc) in accounts receivable |
|
|
and inventory | 40,000 | — |
+ Increase (-dec) in current liabilities | (50,000) | — |
Cash Flowfrom Operations | $182,000 | $149,000 |
Industry Benchmark Information 2010 | |
Sales multiplier | 2.50 |
Free cash flow multiplier | 15.00 |
Earnings multiplier | 22.00 |
Accounts receivable turnover | 10.00 |
Inventory turnover | 12.00 |
Current ratio | 2.00 |
Quick ratio | 1.50 |
Cash flowfrom operations ratio | 1.20 |
Free cash flow ratio | 1.10 |
Gross margin percentage | 30.0% |
Return on assets (net bookvalue) | 10.0% |
Return on equity | 15.0% |
Number of outstanding shares in both 2009 and 2010 is 1,650,000 | |
Weighted average cost of capital for Gordon’s Supply is 5% | |
Year-end stock price, $3.00 | |
Required
1. Calculate and interpret the liquidity, cash flow, and profitability ratios for Gordon’s Supply for 2009 and 2010. For simplicity, you may calculate the 2009 ratios with the assumption that receivables, inventory, and total assets are the same in 2009 as 2008.
2. Develop a business valuation for Gordon Supply Company for 2010 using the following methods: (a) book value of equity, (b) market value of equity, (c) discounted cash flow (DCF), (d) enterprise value, and (e) 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 2010.
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