Based on PGSC’s fore casted financial statements, are its profitable operations sufficient to quickly bring it into compliance with the bank’s requirements?
Pacific Grove being a profitable company had been re-investing all of its profits to be able to finance future growth within the company, but in the current situation the retain earning are not sufficient to be able to finance the continuously increasing sales. Pacific’s is in contact with a large regional bank who is willing to finance the operations of the company through the use of short-term notes payables which uses the account receivables of the company as leverage along with long term debt, which will be in the comfort of other assets of the firm along with the earning potential of the company.
With the loan amount received and the operation running smoothly the company was back on to its pattern of fast growth in sales, but with the 2008 crises, bankruptcy of many banks Pacific’s finance lenders being under pressure from the regulators after revised legislations were made to restrict their exposure. By the end of the last financial year Pacific held a total debt of $37 million which stood as of 62% of its total assets and 216% of owners’ equity, along with 3.47 times equity multiplier ratio and interest cover ratio of 2.15 these were all alarming figures for the lenders considering the current economic situation.
The bank issued formal notices to reevaluate their action plan to be able to reduce their debt to equity ratio to 55%, equity multiplier to less than 2.7 times and if not done so the company will be denied further funding and with current economic conditions there were not many banks which were willing to finance any operation.
Peterson the CEO along with the CFO Fletcher Hodges reevaluated the operations of the company forming a 4 year forecast, which they believe was reasonable beyond any doubt and the company will be able to achieve under the current action plan of the company.
Ratio Analysis on debt to equity, equity multiplier and interest cover upon the 4 year forecast showed very promising results for the company, with the debt to equity ratio showing a 10% decline rate in the fore casted years leading it to 55% in the year 2015, even though this is promising but the bank might not be satisfied with it as it still not reduced by 2012 under which the bank should be taken in confidence, the company would not take any loan till its ratio goes below 55%, the equity multiplier reduces by 16% in the fore casted years reaching 2.7 in the year 2015 again there will be a need to take the bank in confidence, whereas the interest cover reaches 2.6 times in 2015 increasing with a rate of 7.34%, if the company wants to take the bank in confidence this ratio should be reduced the company would need to work on it.
Should PGSC produce and sponsor the new TV program? If yes, how should PGSC finance the necessary investment?
It is believed that the cooking program will be a very successful venture for the company since it is a very well-known cooking network and they have a very popular chef on a 5 year contract who would be doing the new half-hour program, Pacific would be the sponsor of the show or could look into bringing multiple sponsors for the show as Pacific is one producing it, the company will hold all the decision making power.
The up-front capital expenditure required by the company is not that high, the cost stood at $1.4 million, which included all the television equipment and production capacity, the investment appraisal conducted by the company shows an IRR of 41%, which a remarkable return considering the investment made, the sensitivity analysis shows even if the sales goes down by 25% with all remaining variables being constant the IRR will still be 20% which is still a very high return.
There is no doubt the investment should be made, but the consideration point how Pacific would be able to generate $1.4 million, the company does not have enough retain earnings, nor the company can issue any debt with the high gearing and the restrictions from the lenders to maintain a 55% of gearing the bank would not issue any more loan notes with the new restrictions and the depressed economic condition they might not be many bank that would want to lend to Pacific, equity being the only remaining option but again depressed economic conditions means the company will not receive a value for money for it issuance of share combine that will the increased cost of compliance and issuance cost the company would not gain anything out of issuance of shares....................................
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