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Pacific Grove Spice Company’s Case Solution & Answer

Pacific Grove Spice Company’s Case Solution

Contents

Case Problem.. 4

Key Issues. 4

Analysis of Case. 5

Financial performance of Pacific (Situation 1) 5

Pro Forma financial statement (Situation 2) 5

Interest bearing debt percentage. 5

Equity multiplier 6

Peterson Perception. 6

Bank Agreement and this impact on firm Strategy. 7

Investment on a good TV show (Situation 3) 8

Issuing a stock for an investor (Situation 4) 8

Acquire high country seasoning (Situation 5) 9

Effect of economic condition (Situation 6) 10

Recommendation (Situation 6) 10

References. 11

Appendices. 12

Exhibit 1. 12

Exhibit 2. 13

Exhibit 3. 14

Exhibit 4. 15

Exhibit 5. 15

Exhibit 6. 16

Exhibit 7. 17

 Introduction

Pacific Grove Spices Company was started by Judith Findra as a grocery store in California in the 1980s, which offered spices and other basic grocery items in their stores. Basically, the founder of the store was interested in Indian cuisine, which is why he used to expand his product range of spices throughout the time. The spice industry was initially started by Egyptians who were sing the spices in their food in 3000 BC. After the spices’ trade, the demand for spices increased. The changing trends were the key element for Judith to jump into the spice market because the people were becoming more health-conscious and the trend of considering cooking as an art was at the peak. . These factors contributed to the success of Pacific Grove Spices Company. Within the 10 years; the company became a well-known public-owned company that was serving spices throughout 50 states. The company is in the growth phase and the financial condition of the company was sound but needs investment for further development. The basic issues which the company’s financial investment was facing were the need for investments due to the higher sales ratio because the company’s internal finance was not sufficient to cover the growth which the company had aimed for, due to which the company opted for the short term debts.  In this case analysis, we will discuss the options that Pacific Grove spices have to meet their financial requirements. In 2008 The Company faced a financial crisis and banks also pressure to reduce their credit loss. 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. In this case, we will analyze the options company has to increase the investment in the company.(Stephenson, 2012)

Case Problem

The banks began out pressurizing the regulators to restrict their publicity to transient credit score losses. As an end result of which, the Pacific Grove Spice Company, Bank these days instructed its control that as of June 30th, 2012; the hobby payable need to be decreased to much less than 55% of general belongings and the inventory multiplier need to be decreased to much less than 2, 7 times. The financial institution will refuse extra lending if the commercial firms can fails in assembly through this conditions. There is end outcome of this activity wants to discover the different technique to reduce its proportion of short-time period hobby-bearing debt even as efficiently maximizing the shareholder value for a long-time of period. Presently, there are 3 options are needed to be evaluated for Pacific to achieve its investment goals and maximizing the value of its shareholders. (Fruhan, 2011)

Key Issues

Debra Peterson who’s the President and CEO of Pacific Grove Spice Company is comparing the economic role of the organization, which will give an advantage of suitable mortgage from the financial institution. Most importantly, the credit score committee is a key participant from the financial institution, which has been very conservative in granting loans, in mild of the 2008 economic crisis. However, primarily based totally on Debra’s analysis; the financial institution will then determine how a bad lot of the mortgage is to be granted. Beyond the economic constraints, Debra Peterson is being helped by the CFO, Fletcher Hodges, who’s assisting Debra in comparing the 3 to be had funding opportunities, namely:

  • Accept/ Reject an offer from a cable cooking network to sponsor and produce a show.
  • Raise new equity capital by selling shares of the common stock.
  • Acquire High Country Seasonings. (Craig, 2012)

Analysis of Case

(Situation 1)

Pacific Grove’s economic overall performance remained robust over the 5 monetary years ended on June 2011. The employer’s income have improved from 15% in 2008 to 19% in 2011, displaying a CAGR of 12% over 5 years. The employer has maintained a solid gross margin percent of 42% over the 5 years. However, the employer’s internet earnings margin has been growing and has reached to nearly 3%, which represents a 1.5% boom over the 5 years. It is likewise vital to observe that the employer has maintained a good manage at the R&D and SG&A expense. This has translated right into a better ROE for the employer, which grew in double digits over time to attain 13.8% in 2011. Also, Pacific Grove is paying off its lenders in 30 days internet as represented through the day’s payable ratio, which indicates that the employer continues enough cash to pay to its lenders (Exhibit 1).

(Situation 2)

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.

  Actual Projected
  06/30/07 06/30/08 06/30/09 06/30/10 06/30/11 06/30/12 06/30/13 06/30/14 06/30/15
Bank Notes Payable $7.66 $8.82 $9.61 $11.2 $13.4 $15.4 $17.5 $19.4 $21.1
Long-Term Debt 14.60 15.89 16.86 18.60 22.24 24.20 26.25 27.61 28.02
Total interest bearing debt $22.2 $24.7 $26.4 $29.9 $35.6 $39.6 $43.7 $47.0 $49.2
Total assets 36.72 40.61 44.09 50.36 59.62 67.87 76.69 85.13 92.79
Interest bearing debt percentage 61% 61% 60% 59% 60% 58% 57% 55% 53%

Equity multiplier

As calculated in the table below; the equity multiplier came down to 2.7 times, however; it is still just 10 basis points above the expected level, but it is pretty close to the bank’s requirements.

  Actual Projected
  06/30/07 06/30/08 06/30/09 06/30/10 06/30/11 06/30/12 06/30/13 06/30/14 06/30/15
  Total Assets 36.72 40.61 44.09 50.36 59.62 67.87 76.69 85.13 92.79
  Total Shareholder Equity 10.50 11.42 12.77 14.82 17.19 20.54 24.37 28.69 33.48
Equity multilpier 3.50 3.56 3.45 3.40 3.47 3.30 3.15 2.97 2.77

Peterson Perception

Pacific income debts to reduce the funding on each of the PPE and Accounts Receivable. It is consequently reduce the Assets as a part of the Equity Multiplier Ratio for this organization. That it will be assist in the organization in lower the Equity Multiplier ratio as a demanded the way of the bank. However, if the Interest-Bearing Debt remains equal and Total Assets reduces; it is grow the Interest-Bearing Debt Percentage ratio………………….

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