Pacific Grove Spice Co. Harvard Case Solution & Analysis

Question No. 2: Should Pacific Grove produce and sponsor the new television program?  If yes, how should Pacific finance the necessary investment?


As per the calculations and reasonable judgments, the new television program seems feasible because it will generate an Internal Rate of Return of 41% and sensitivity analysis has also been performed which determines that if the sales of the company deteriorates by 25%, then still the company would be able to generate an IRR by 20%, so from the finance perspective the company shall consider to produce and sponsor the new TV program.

The company is already facing some difficulties in raising finance and if the company agrees to go with the potential strategy, then the company would require additional finance to finance the sponsorship of the new program. Our analysis in Exhibit 3 shows that the company will require an initial investment of $3,899,542.

The company has only two options available to finance its future projections, the first option being thedebt finance and the second option is to finance the strategy through equity.Since, as it is stated earlier, that the bank will not provide any loan facility to the company. It means that the company had only one choice for further projects i.e. Equity finance.

The company has a couple choices available for issuing shares. The company can either issue share to open public or can approach the investment group. If the shares are issued to the general public then it has some drawbacks because the securities have become more vulnerable after the financial crises in late 2008.

Question No. 3: Should Pacific issue new common stock to the external investment group?


Despite the financial market has become very unstable and unpredictable after the financial crises of 2008, this makes the sale of new common stock more difficult and more expensive. If the company ignores the possibility and considers issuing the shares to the external group then the organization would be able to generate $11 million after considering any transaction cost.

If the company considersissuing shares then the company must also consider the potential impact of issuing shares as well; Equity issuance is the most expensive mode of financing because the shareholders obtain a residual interest in the profits of the company. Increase number of shares will lead to a decreased Earnings per Share and that, obviously will not be accepted by the existing shareholders of the company.Moreover, the dividend is not a tax deductible expense in calculating taxable profits, so it clearly indicates that the company will not begetting any tax savings.

Question No. 4:Should Pacific acquires High Country Seasonings?


On the basis of our careful financial analysis and based on our reasonable judgments,it is suggested that the proposal for acquiring High Country Seasoningswill not be financially viable, because our analysis in Appendices 2 determines that the Net Present Value (NPV) from the potential project will amount to $12 million whereas on the other hand, High Country demands $13.2 million for the controlling interest in the company, the excess amounts can also be an indication of goodwill as well, so the organization must critically evaluate before taking any decision.Different assumptions have been undertaken for determining the present value of cash flows, which has been described as: the equity beta of comparative companies have been ungeared so as to determine the asset beta and to consider to risk of the specific company.

Although, the financial factors are key factors behind any financial decision, but non-financial factors should also be considered. HCS execute the same operations as Pacific Grove and if both the companies are consolidated then it will give rise to some synergies, subject to collaboration and coordination between the partiesin distribution channel which will reduce cost substantially and enable company to achieve economies of scale which will increase the cash flows of the company and more cash will be available to the company for its distribution to shareholders..................................

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