Pacific Grove Spice Company Harvard Case Solution & Analysis

Pacific Grove Spice Company Case Study Analysis

Nevertheless, it would also lead towards a decrease in EPS. In addition to which, when the companyfurther issues shares; it would send false negative signals to outsiders, that the company isnot doing well and could end up losing investors’ confidence, which could decrease its share price.

Acquire High Country Seasoning:

The last option is to expand the business through the acquisition of a small successfulcompany“High Country Seasonings” in the form of common shares, with the sale price of$13.2 million, resulting in 404,902 shares at the current price of $32.60 per share. Despite thefact that it has the same dilution issue with the 2nd option; it would still be a betteroption as it puts the company at the position whereit could increase its profitability in the future. Thefigures in Exhibit 4 and Exhibit 5 reveal that not only the High-Country Seasonings (HCS) was providing benefits an increasing sale, but it was also protecting Pacific from the worst situation of having long term debt, as HCS didn’t have any long-term debt.After consolidating thebalance sheet and income statement of both companies, it can be concluded that both debt-to-asset ratio and equity requirementshave been met, and the profitability is expected to have an  improvment.

We further analyze this option using the discounted cash Dow method, to ensure that thecompany is not overpriced. As the firm’s value is 25.93;it is not over-priced. Hence, this acquisition could prove be a good choice for Pacific. However,it is necessary to address the dilution issue.

Influence of Economic:

After the global financial crisis in the year 2008; most of the banks and corporate businessesslowed down. The growth rates of the businesses were plummeting. Furthermore, the banksalsotightened their banking policies as required by the regulators, which effected the financialfunding source of the company. The beta used to calculate Pacific’s required rate of return could have high volatility,leading to variation in NPV of acquisition of High Country, which makes the result lessreliable. The fluctuation in the economic conditions also affect the precise of the projection, whichmakes it difficult to predict the future outcome accurately.

Recommendations:

In the short term, the company can either exercise option 3, as it tends to bring in more benefit for thecompany in terms of profit or it can combine option 1 and 2 by funding the TVprogram usingthe cash injection from share issue. As mentioned above, this is totallypossible since after the retirement of some long term debt to reach the requirements; the companywould still have extra cash to fund any project. It depends on the firm’s situation to allocatehow much cash for investment and how much cash to retire debt are required to beanalyzed further.

The company can also propose convertible debt to swap into equity, in order to reduce its level ofdebt.Another point is that the firm can adjust its term of sale so that its account receivable could be paid faster and its payable term could be longer. This in turn would reduce the working capital needs asaccount payable can be seen as a form debt. In the long term, the company can buy back its share when it passes its growth point andwould have stable revenue. This can boost the company’s share price.................................

 

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