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Pacific Grove Spice Company Case Study

1390 Words6 Pages

Staff Analysis
Statement of the Problem
Pacific Grove Spice Company (Pacific) manufactures, markets, and distributes high quality spices and seasonings in Central California. In July 2011, Pacific is asked by its financing bank to provide an action plan for how it will meet the bank’s new requirement of reducing its interest bearing debt to less than 55% of total assets and its equity multiplier to less than 2.7 times. Pacific’s main problem is determining whether it will be able to meet this requirement and obtain additional credit from the bank in the future, or whether it will need to find a new financing option. At this time, Pacific is also presented with three opportunities for growing and financing its business. First, Pacific can produce and sponsor a new television program, which it will need to obtain additional financing for. Secondly, Pacific can issue new common stock to an external investment group. Lastly, Pacific can acquire High Country Seasonings (High Country), a private spice company. Management will evaluate these opportunities using financial ratios, forecasted financial statements, net present value (NPV) of projected free cash flows (FCFs), and consolidated financial …show more content…

Analysis of the project NPV for the cooking program in Exhibit 3 signals to Pacific that investing in this company will provide additional value to the company due to its positive NPV at various discount rates. The internal rate of return (IRR) of the projected free cash flows is 41% at the full sales projection, but is reduced to 20% when 75% of the sales projection is obtained. After closer analysis of the sensitivity of NPV to discount rates and sales projections provided in Exhibit B, the acceptance of the project at 75% of the sales projection is dependent on the discount rate remaining below

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