Davis Boatworks

Topics: Capital asset pricing model, Net present value, Generally Accepted Accounting Principles Pages: 13 (4530 words) Published: November 8, 2007
Executive Summary

Carson "Buddy" Davis started Davis Boatworks in 1973 and by 1999 was one of the leading players in the industry. The company did not spend time or resources on traditional marketing strategies. Though they participated in two or three trade shows a year, they mostly relied on repeat customers, word of mouth and Buddy Davis himself to attract customers. The company had focused on the manufacturing and sales side of business for years. The company was basically run out of a checkbook and there were no formal accounting controls until John Altizer was hired as the CFO.

The sport fishing boat industry in 1999 was booming and Davis Boatworks had more orders than their current manufacturing facility could handle. An expansion of manufacturing facility would cost then $3 million. They also needed an infusion of $2 million to improve their net working capital. In order to achieve this Carson Davis was contemplating selling part of his stake in the company to an investor. Most of Carson Davis's personal wealth was tied up in Davis Boatworks as equity. Buddy Davis hoped to take $5million to $10 million personally from this transaction.

To find the value of the firm, we have reviewed the recent financial statements including actual income and balance sheet from FY1996 - 1999 and projected income and balance sheet with and without expansion from FY1999 - 2003. We also considered historical rate of return data for the analysis.

We employed the Capital Asset Pricing Model (CAPM) with this data to find the value the firm to be $1.69million - $2.89 million.

The Problem

Carson "Buddy" Davis started Davis Boatworks in 1973 making a single 46' boat for a customer in Manteo, North Carolina. Over the next twenty-six years, Davis earned a reputation as one of the most knowledgeable people in the sport fishing industry. Throughout the history of his business, it had been not only the quality of the Davis Boatworks products, but also Buddy Davis' personal involvement in the sale of nearly every boat that had helped the business grow. The opportunity to visit the manufacturing plant and receive a personal tour from Davis continued to draw prospective customers. Davis Boatworks was more than just a boat builder; the company was the manufacturing arm of the Buddy Davis "brand".

Though the company participated in two or three trade shows each year, it did not spend much time or resources on traditional marketing. Instead Davis Boatworks relied on repeat customers, word of mouth and Buddy Davis himself. Fully 50% of Davis Boatworks sales were repeat customers. Given that most first time Davis customers did not purchase the larger 61' to 78' boats, it was important to be able to offer them an "entry level" Davis boat in the 50' range. These initial sales were the foundation of the company's future sales as customers looked to "trade up" on their next boat purchase.

The customer bases consisted of a diverse group of individuals who had a significant personal wealth in excess of $50 million and were willing to pay a minimum of $1 million to purchase a sport fishing boat. Customers purchasing decisions were influenced by a number of factors including length of construction time, customization, amenities and price.

Prior to the 1990 government implementation of the luxury tax, there were nearly 20 competitors vying for the market share. By 1999, the number of industry players had dwindled to only six notable manufacturers. Viking Yachts was the most formidable competitor. Their signature was the 55' boat. They were regarded as the second highest quality manufacturers of sport fishing boats in the world and had a meaningful international presence. Ocean Yachts was known for producing lower prices boats that offered outstanding value for owners. Their signature boast was a 56' boat. Post Yachts competed in the mid priced boat segment. They concentrated in the 50' category. They controlled less than 5% of the...
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