Pacific Grove Spice Company Case Study Solution
Due to the 2008’s financial crisis; the banks startedpressurizingthe regulators to limit their exposure to temporary credit losses. As a result of which, the Pacific Grove Spice Company Bank recently told its management that as of June 30th, 2012; the interest payable should be reduced to less than 55% of total assets and the stock multiplier should be reduced to less than 2, 7 times. The bank will refuse additional lending if the business fails in meeting these conditions.
Despite the requests from banks; the company continues to evaluate other fundraising opportunities. The purpose of this note is to assess all other options available and suggest the company with the best option to keep itself continued to moving forward.
Recently, the cable TV network contacted the company to come up with and sponsor a new plan, which could increase its sales by $ 8.1 million in the 2011 budget, and grow by 5% within 5 years. In addition to the operational expenses; the company would have to incur an upfront cost of $1.4 million and incremental working capital every year.The financial analysis predicts that this project would have a positive NPV in the baseline scenario, the best-case scenario and the worst-case scenario.
If the discount rate is 20%, it will only be negative in the worst case. The Pacific Grove Spice Company could not ask the bank to finance the project. The company is also unable to use retained earnings as the retained earnings are not sufficient to finance the growth of additional assets to support the sales growth.
The only way to raise funds for the plan is to raise capital, but due to the 2008 financial crisis; the financial market is in turmoil, making it harder to sell new shares. Therefore, the company is not able to use this alternative method. Pacific Grove Spice Company CEO Peterson has also contacted external investors to sell the new common stock to finance growth and to reduce the company’s total debt.
Key decision Maker:
The decision maker is Debra Peterson who is the President and CEO of Pacific Grove Spice Company. She is evaluating the financial position of the company so as to gain an appropriate loan from the bank. Most importantly, the credit committee is a key player from the bank, which has been very conservative in granting loans, in light of the 2008 financial crisis. However, based on Debra’s analysis; the bank will then decide how much of the loan is to be granted; therefore, the bank and credit committee are also considered as decision makers in this case. Beyond the financial constraints; Debra Peterson is being helped by the CFO, Fletcher Hodges, who is helping Debra in evaluating the three available investment opportunities, namely:
- Accept/ Reject an offer from cable cooking network to sponsor and produce a show.
- Raise new equity capital by selling shares of the common stock.
- Acquire High Country Seasonings.
Pacific’s Financial Performance:
Pacific Grove’s financial performance remained strong over the five fiscal year ended on 30thJune 2011. The company’s sales growth increased from 15% in 2008 to 19% in 2011, showing a CAGR of 12% over five years. The company has maintained a stable gross margin percentage of 42% over the five years. However, the company’s net profit margin has been increasing and has reached to almost 3%, which represents a 1.5% growth over the five years. It is also important to note that the company has maintained a tight control on the R&D and SG&A expense. This has translated into a higher ROE for the company, which grew in double digits over the years to reach 13.8% in 2011. Also, Pacific Grove is paying off its creditors in 30 days net as represented by the days payable ratio, which shows that the company maintains sufficient cash to pay to its creditors.
Projected Financial Statements:
Interest Bearing Debt Percentage:
As calculated through the table below; the interest-bearing debt percentage for Pacific Grove would decrease from 55% to 53% by 2015………………………………….
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