Pacific Grove Spice Company Harvard Case Solution & Analysis

Pacific Grove Spice Company Case Solution

Analysis of the Pacific Spice Grove Company Forecasted Statements

It is expected that the management of the company is performing well and sales ratio and profit margin ratio of the company is continuously increasing which shows that the company is growing along with improving the financial health of the company. As the company is relaying on debt for investment and financing decisions and the bank of the company imposed certain restriction with respect to the available debt ratio, therefore, the management of the company is concerned about the investment and financing issues regarding the future business and corporate objectives.

It is clear from the financials of the company that the sales of the company are increasing with a good ratio and in order to support the sales, total assets of the company are also increasing significantly. However, the bank imposed debt covenants of 55% debt to total assets and equity multiplier 2.7 by the end of the year 2012. It is expected that the debt/ assets ratio of the company will be 62% at the end of the 2012 and equity multiplier will 3.4, therefore, the forecasted sales, assets and profit are not sufficient to fulfill the debt covenant that imposed by the back of the company.

Ratios under Forecasted Data
06/30/11 06/30/12 06/30/13 06/30/14 06/30/15
Financial Leverage 3.4666217 3.3040344 3.1461718 2.9669144 2.7710769
Debt/Assets 62% 61% 59% 57% 55%

 Should Pacific produce and sponsor the new television program

It is expected that the core area of concern for the management of the company is to comply with the debt covenants that are imposed by the bank of the company, therefore investing in a project by taking more debt is not a feasible option. As the proposed investment requires heavy initial investment and it is generating positive net present value and along with the significantly greater IRR therefore on financial grounds the project seems feasible and will help the company and of the management by increasing total financial wealth and value of the company.

 As it will generate returns in longer run and the management is concerned to meet the bank obligations by the end of the year 2012, therefore undertaking the project against 400,000 shares at a share price of 27.5 per share by accepting the investment group proposal will help the company in order to qualify the debt covenants that is being imposed by the bank.

It is expected that accepting the offer of the investment group will reduce the equity multiplier to 2.5 and will also decrease the debt over total assets ratio to 53%. Hence, by accepting this offer, the financial health of the company will improve along with meeting the restrictions from the bank in order to avail the debt facility in future.

Should Pacific issue new common stock to the external investment group?

The Pacific Grove has currently had shares which are divided into three main categories i.e. Founders, Peterson, and other investors. Moreover, the company's shares are being traded on a market value of almost $32.6 which is much higher than the book value as the book value of each share indicates an amount of $27.Pacific grove Case Solution

The company's shares have a book value of almost 7 million while its market value is almost 38 million. This indicates that the shares of the company are valued higher than their original prices.

There may be certain reasons behind this, but the most concrete reason for the appreciated price of these shares is the profitability of the company and its capital structure. Also, currently, the company's equity composition is based on three main dimensions i.e. 25% for founders, 7% for Peterson and rest for other investors...........

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