Sun Ray Boats
The family has decided to sell Sun Ray Boats as well due to the cyclical nature of the smaller boat manufacturing and sales business. The family is considering buying a boat manufacturing operation that builds much larger boats and is less cyclical. The following information was provided to AE relating to Sun Ray Boats for the last fiscal year.
Operating financial information:
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Fiscal year ended November 30, 2011
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Revenues
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$20 million
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Cost of goods sold
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$10 million
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Selling, general and administrative expenses
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$5 million
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Income before taxes
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$5 million
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Allocated income taxes at 35%
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$1.75 million
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Net income
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$3.25 million
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Net after tax cash flow
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$6 million
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Boats sold in fiscal 2011
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1,400
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Balance sheet financial information:
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Fiscal year ended November 30, 2011
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Total assets
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$45 million
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Total debt
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$19 million
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Total equity
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$26 million
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Latest fiscal year earnings
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$3.25 million
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Latest fiscal year return on equity
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12.5%
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Earnings per boat
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$2,300
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Sun Ray Boats has a good reputation in the industry and their construction has always been the best in the small boat leisure and fishing-class category.AE identified two private manufacturers similar in size that have changed hands within the last 18 months. These are Dolphin Boats and Key West Boats. Following is the financial information for these entities:
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Dolphin Boats
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Key West Boats
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Total assets
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$ 35 million
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$50 million
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Total debt
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$22.5 million
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$25 million
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Total equity
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$12.5 million
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$25 million
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Latest fiscal year earnings
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$1.5 million
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$2.88 million
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Fiscal year return on equity
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12%
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11.5%
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Number of boats produced
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1,000
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1,600
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Earnings per boat
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$1,500
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$1,800
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Revenue in last fiscal year
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$13 million
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$31 million
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Sales price of entity
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$18 million (12 times earnings)
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$31 million (11 times earnings)
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AE also indicated that if you were to use a discounted cash flow analysis to estimate value, that a 20% discount rate should be used. Furthermore, they indicated that the growth factor for years two through five should be 3% with a 1% growth factor after that.
Required - Based on the above information about Sun Ray Boats and the comparable transactions, estimate the value of Sun Ray Boats. Apply:
(a) Similar transaction method (consider the enhanced earnings capacity)
(b) Discounted cash flow method (use the end-of-year convention)
You may create Excel spreadsheet to answer these questions. Please be neat and show all work and formulas.