Pacific Grove Spice Company Harvard Case Solution & Analysis

Introduction:

Pacific opened a business as small specialty grocer in California in the early 1980’s, dealing in the sale of food items like coffee, tea and other food items. Founder of the company is interested in Asian and Indian cuisine and offering the spices to support a range of international foods, due to the international expansion and variety of international food item, company is known as the place to find the spices in the California states. Company has good market performance and reputability in the region that it covers approximately 50 states and over 90% of their sale are made through high end grocery stores, like whole food market, and the remaining is acquired through the internet sales platform. The industry in which the company exists, was growing as the concern was to reduce the fats in the diets in different and same flavors.

Pacific company’s objective is to make the product of highest quality and out of the most fresh spices. Furthermore, company is continuously looking forward to search the herbs and new spices worldwide to develop the new flavors and taste in food items. Moreover, the company is using the debts and retained earnings for its financing and the remaining finance are obtained from the regional bank, through short term borrowing, notes payable, long term debts in mortgage.

Problem Statement:

Pacific Grove management concern is about the financial strategies for the future growth of the company. The other problem faced by the management of the company is the financial limitation imposed on the company by the bank.         The management was concerned about the financing strategy of future growth of the company. Further, the management was also concerned about the financial limitations which have been imposed by the bank and it also includes consideration about the evaluation of possible options.

Analysis:

This analysis is done with respect to different financing decisions available to the company that is further issuance of new equity, or to increase the level of debt in the capital structure of the company.

Bank Loan:

Banks are more concerned about the debts repayments in the financial crisis period, due to which the banks forces debt holders to comply with the terms and condition, limitation, and requirement imposed by the bank on these debts and also to ensure the liquidity of the clients. Bank require the company to maintain total assets to debt ratio as 55 percent and equity multiplier is to be 2.7 percent, as the current total debts to total assets ratio of the company is approximately 65 percent and the equity multiplier is 2.15 percent, the bank force the company to reduce the equity multiplier and total debts to total assets ratio to comply with the terms and condition of the bank.

The analysis of the forecasted data of the Pacific Grove shows that the equity multiplier would be 3.30, 3.15, 2.97 and 2.77 times for the year 2012 to 2015 respectively and total debts to the total assets would be 61%, 59%, 57% and 55% for 2012 to 2015 respectively. This analysis clearly states that the company fails to maintain the requirement of the bank and the company fails to reduce the total debts to total assets to 55 percent for the initial three years.

Moreover, company fail to maintain the bank terms and condition and requirement of the debts, the bank may not renew the debt facility available to the bank. Furthermore, the company can also forecast further years to renew the debts facility of the bank.

Sponsorship of New Program:

Sponsorship of new program is suitable for the Pacific Grove to raise the financing that the investment is generating internal rate of return of 41 percent and sales sensitivity shows that the company have a margin 25 percent, at the same point company will able to generate internal rate of return of 20 percent, as IRR measures the investment profitability. The greater internal rate of return indicates that the financing decision would be the positive move by the company to sponsor and produce the programs. Pacific Groves should also considers the other aspects of this investment, that is the company has never deal with the program production, and have no prior experience, and the company should consider the sufficient capability to adopt the change and returns on the investment.

The company is facing trouble to raise the finances for the company, and for this investment company requires additional $3.9 million as the initial cost of the sponsorship......................

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