Williams Company is a manufacturer of auto parts having the following financial

Question

Williams Company is a manufacturer of auto parts having the following financial statements for 2016.

Develop a business valuation for Williams Company for 2016 using the following methods: (1) book value of equity, (2) market value of equity, (3) discounted cash flow (DCF), (4) enterprise value, and (5) 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 2016.

Williams Company is a manufacturer of auto parts having the following financial statements for 2016.

Explanation / Answer

The following methods of valuation are explained below ;

1.Book Value of Equity =Total Assets-Total Liabilities (Excluding Equity)

                                  =$2695000-(Current Liabilities +Long Term Debt)

                                  =$2695000-($420000+$920000)

                                  =$1355000

So in a broader sense it can be interpreted that if Williams Company sold off its assets and pays down its liabilities the equity value or net worth of the business would be $1355000.The return on equity is much lesser as compared to the industry standard of 30% which is 13.43%

2.Market Value of Equity is the total dollar value of a company equity calculated by multiplying the current stock price by total outstanding shares.A company market value therefore constantly changes based on these two variables.

                                       =2,000,000 *$4.25

                                       =$85000000

   3.Free Cash Flow =Net Income+Depreciation -Capital Expenditure -Change in NWC

                             =Net Income + Depreciation -Capital Expenditure -(Increase in Accounts Receivable -Increase in Current Liabilities)

                              =$182000+$160000-$165000-($155000-$125000)

                              =$147000

Discounted Free Cash Flow =$147000/(1/1.05)

                                         =$140000

4.Enterprise Value =It is ratio of the entire economic value of a company to the cash it produces

                           =(Market Capitalization +Total Debt -Cash)/Cash From Operations

                           =(2,000,000 *$4.25+$920000-$280000)/$312000

                           =($85000000+$920000-$280000)/$312000

                           =274.5

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