Pacific Grove Spice Company Case Solution & Answer

Pacific Grove Spice Company Case Solution 

; the banks started pressurizing the 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.

Question 2

The issuance of new equity by Pacific seems a viable alternative, as it would be a source of additional financing for the company which would support the company’s operations and reduce the company’s financial gearing levels. According to the figure below the company has outstanding shares of 765327 with a current market price of $32.6.

The alternative to issue new common stock to the external environment involves the issuance of stock at a price of $27.5, which seems to be a disappointing option offered by William Rodriguez (associate of Peterson). It is because the stock is currently trading at a price of $32.6 and the new shares are issued at discounted price of $27.5. The reason for a decline in stock price is the challenge faced by Pacific in maintaining its huge position among the giants of the NASDAQ market. Further, the confidence of the investors have declined after the 2008 crisis, making it more an expensive and difficult option to issue new shares in NASDAQ.

As explained in Appendix 1 below, the issuance of 400000 shares would lead to total outstanding shares of 1165327 and a stock price of $30.84 per share. The issuance of new shares seems to be a viable option, though it would lower the stock price of the company. But it would reduce the debt burden of the company and the increase the growth potential by providing funds for its operations.

 Question 3

Producing and sponsoring a cooking program, with an experienced and popular chef on a contract of 5 years, seems a profitable opportunity for Pacific. Being a producer and sponsor of the cooking program Pacific will hold the decision making power.

The program is e by $81, 00,000 with an average growth rate of 5% for the further four years. The total capital investment required in producing and sponsoring the cooking program is equal to $1,440,000. The project is expected to provide an internal rate of return (IRR) of 41% at the expected to improve the operation performance of the company i.e.  The sales are expected to increased level of incremental sales. Even if the conservative approach is followed by keeping the incremental sales at 75%, the project would still generate an IRR of 20%, which seems a viable and lucrative opportunity for Pacific.

Moreover, the Television program will enhance the return on equity of the company as shown in figure 2. Earlier, the ROE of the company equalled 13.8% in 2011. The compounded annual growth rates have been calculated for the net income and average shareholder’s equity in order to forecast the net income and equity for further years. The net income is then divided with the shareholders’ equity, which resulted in ROE of 16.28% in 2012, 15.73% in 2013, 15.04% in 2014, 14.31% in 2015 and 13.71% in 2016.

Additionally, the financial metrics of the company will improve by the Television program, through a reduction in the debt-to-equity ratio of Pacific. As shown in Appendix 2, the company’s current debt and equity amount to $37.2 million and $20.542 million respectively. However, the project increases the equity of the company with a net present value of $2.405 million. It reduces the debt to equity ratio of the company from 1.8 to 1.62.

Lastly, the company’s financial position to take on the television program alternative is measured by the current working capital of the company i.e. $13.406 million. An initial investment of $1.44 million is required to produce and sponsor the Television program and after covering this initial investment, the company has an excess working capital of $11.966 million. It means that the television program is a viable opportunity for the company, as it reduces the financial debt, thereby generating an IRR of 41%, reducing the D/E ratio and increasing the company’s ROE

Question 4

The other for the Pacific company is to acquire High Country Seasonings, a small company at a price of $13.2 million. The acquisition would lead to 404,902 common shares at a current price per share of $32.6. This option would be a viable opportunity for the company, a sit increases the company’s profitability and creates worth for the existing shareholders, by reducing the debt to equity ratio…………….

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