Pacific Grove Spice Company Harvard Case Solution & Analysis




The Pacific Grove Spice Company was an organization involved in the production, distribution and Marketing of high quality spices and seasonings. The company had gained good sales over the year due to which it had enabled it to achieve current share price of $ 32.60 with a market capitalization of 38 million. As the company had a policy of retaining the profits in order to keep it for the funding of the operations however, these retained earnings were not sufficient enough to fully cover the funding needs and thus the company had to rely on the debt as well.

Subsequently when the world was affected by a number of events arising from financial crises in 2008, many banks were required to reassess their risk level and thus restrict their lending capacity in order to reduce the overall risk of bankruptcy. As a result of it, the banks started to strict their lending criteria, due to which the Pacific Grove Spice company was required by the bank to reduce its equity multiplier and debt percentage of total Assets less than 2.7 times and 55% respectively.

Q1. Based on Pacific grove Spice Company (PGSC) forecasted financial statements, are its profitable operations sufficient to quickly bring it into compliance with Bank requirement?

According to calculations in the Appendices, the company would be able to achieve high profitability in the upcoming years as shown in the Net Profit Margin by the following Graph:

It was also expected that the company would maintain its gross profit margin of 41.50% throughout the upcoming years in the future, however, it was envisaged that company’s demand for the product would be reduced which in turn would reduce the need for additional investment in working capital and noncurrent assets. Similarly, the company would be able to reduce its equity multiplier in a linear fashion as depicted by the following graph:

The equity multiplier was the product of Total Assets divided by Owner’s Equity, which helps to show how much assets were attributable to the owner of the equity, however as the bank requires it to be decreased in order to increase the amount of available assets for financing the debt of the company.

Similarly, the bank also requires the reduction of debt as a percentage of total assets. The company might be able reduce the debt level in the future in a similar way,as shown by the following Pie Chart:...


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