Que 1- Based on Pacific Grove Spice Company’s forecasted financial statements,

are its profitable operations sufficient to quickly bring it into compliance with the

bank’s requirements?

Ans- According to Pacific Grove Spice Company’s forecasted financial statements, its
profitable operations are not sufficient to comply with banks requirements by 30 th June
2012. With respect to the table given below based on financial statement it would not be
able to lower its Equity Multiplier to 3.3 and its total debt to total assets would be 61%.
And banks requirement is to reduce Debt to Total Assets to less than 55% and Equity
Multiplier to less than 2.7 times. However Pacific Grove Spice would be able to comply
with the bank’s requirements by 30th June 2015. The table below shows the breakdown
of Equity Multiplier, Debts to Total Assets and Owners Equity from 2011 to 2015.
Therefore its slow growth rate and stabilized operating income is not sufficient to bring it
into compliance with the banks requirements

Financial 6/30/2011 6/30/2012 6/30/2013 6/30/2014 6/30/2015

Ratios
Equity 3.47 3.3 3.15 2.97 2.77
Multiplier
Total Debt 37.17 41.31 45.52 48.89 51.08
(Millions)
Debt as % of 62% 61% 59% 57% 55%
Total Assets
Debt as % of 216% 201% 187% 170% 153%
Owners
Equity

Que-2. Should Pacific Grove Spice Company acquire High Country Seasonings?
Is the acquisition of High Country a good investment opportunity? What are the
free cash flows, risk-adjusted cost of capital and value? Is it a positive NPV
decision for Pacific? Can the acquisition be made and still enable Pacific Grove
to meet the banks requirements?

Ans- If Pacific Grove Spice Company decides to acquire High Country Seasonings then
it will be able to meet the bank requirements by the end of June-2012. As we can see
from the table below Pacific will be able to reduce its equity multiplier to 2.43 and its debt
as % of total assets to 51%. In regards to the acquisition, Pacific will be issuing 404908
new shares worth $13.2 Million at the price of $32.6 per share to complete the purchase
of High Country Seasonings. This acquisition will result in goodwill worth $3.4 Million on
Pacific Grove Spice Company’s balance sheet. The table below gives a breakdown of its
equity multiplier and its total debt with respect to total assets and owners equity.

Financial Ratios 6/30/2012 6/30/2013 6/30/2014 6/30/2015

Equity Multiplier 2.43 2.38 2.29 2.20
Total Debt (Millions) 42.61 46.28 49.02 51.08
Debt as % of Total Assets 51% 49% 48% 46%
Debt as % of Owners Equity 123% 117% 109% 100%

MV Per Share $32.6

Outstanding Shares 1165327.00
New Shares Issued 404908.00
BV of New Shares $2,393,006.28
MV of New Shares $13,200,000.80
Total Shareholders’ Equity $9,724,000.00
Goodwill $3,476,000.80

Pacific Grove Spice Company Balance Sheet after acquiring High Country
Seasonings ($ in Millions)

Assets 06/30/12 06/30/13 06/30/14 06/30/15

Cash $5.397 $6.048 $6.668 $7.809
Accounts Receivable 22.988 25.706 28.288 30.653
Inventories 16.502 18.296 20.134 21.818
Prepaid Expenses 1.343 1.501 1.652 1.790
Total Current Assets 46.230 51.551 56.742 62.070
Net Property & Equipment * 29.855 33.407 36.783 39.875
Other Long-Term Assets 5.035 5.629 6.195 6.713
Goodwil; 3.400 3.400 3.400 3.400
 Total Assets 84 94 103 112
Liabilities + Owners' Equity
Bank Notes Payable 16.792 18.266 19.562 21.181
Accounts Payable 5.426 6.015 6.620 7.173
Current Portion of Long- 1.614 1.751 1.842 1.869
Term Debt
Accrued Expenses 1.857 2.077 2.285 2.477
Total Current Liabilities 25.689 28.110 30.309 32.700
Long-Term Debt 24.204 26.258 27.614 28.028
Total Liabilities 49.893 54.368 57.923 60.728
Common Stock 6.881 6.881 6.881 6.881
New Stock 13.200 13.200 13.200 13.200
Retained Earnings 14.470 19.390 24.890 30.950
Total Shareholder Equity 34.551 39.471 44.971 51.031
Total Liabilities & Net Worth 84 94 103 112

Pacific Grove Spice Company Income Statement after acquiring High Country
Seasonings

Income Statement 06/30/12 06/30/13 06/30/14 06/30/15

Net Sales $111.874 $125.103 $137.669 $149.180
Cost of Goods 66.010 73.185 80.536 87.270
Sold
Gross Profit 45.864 51.918 57.132 61.910
Margin
R&D Expense 1.677 2.002 2.203 2.387
SG&A Expense 34.977 39.407 43.366 46.992
Earnings Before 9.210 10.509 11.564 12.531
Interest & Taxes
Interest Expense 3.317 3.657 3.926 4.129
Earnings Before 5.892 6.852 7.638 8.403
Income Taxes
Income Taxes 1.591 1.850 2.062 2.269
Net Income 4.301 5.002 5.576 6.134

Hence, It can be concluded from the above details that by acquiring High Country
Seasonings Pacific Grove Spice Company can comply with Banks requirements .
Que 3- Should Pacific produce and sponsor the new television program? If yes,
how should Pacific finance the necessary investment?
Ans- Since Pacific Grove Spice Company needs to reduce its debt in order to comply
with the bank regulation it cannot take any more debt to fund the TV show. However, it
can take the investment offer of $11 million by a investment group in return for 400,000
new shares of Pacific Grove Spice Company stock at $27.5 per share. This is the most
feasible way by which Pacific Grove Spice Company can finance the investment. By
financing the TV show and accepting the investment from the investment group they will
be able to comply with the bank requirements and reduce the equity multiplier to 2.5
and also reduce its total debt to less than 55% of its total assets.

6/30/2012 6/30/2013 6/30/2014 6/30/2015

Equity Multiplier 2.51 2.45 2.36 2.25

Total Debt (Millions) 42.72 46.96 50.32 52.48

Debt as % of Total Assets 52% 51% 50% 48%

Debt as % of Owners 131% 125% 117% 107%

Capital Budgeting Analysis of Television Program Opportunity

The Project is showing positive NPV therefore the Project is feasible.

Changes in Pacific Grove Spice Company’s Income Statement due to sponsoring

the TV show

Income 06/30/12 06/30/13 06/30/14 06/30/15

Statement
Net Sales 101.18 113.69 125.68 136.64
Cost of 59.19 66.51 73.52 79.93
Goods
Sold
Gross 41.99 47.18 52.16 56.70
Profit
Margin
R&D 1.49 1.68 1.87 2.04
Expense
SG&A 30.08 33.93 37.62 40.97
Expense
Promotion 0.89 0.94 0.98 1.03
Expense at
11% of
sales
Depreciation 0.29 0.29 0.29 0.29
Expense
Earnings 9.24 10.34 11.40 12.37
Before
Interest &
Taxes
Interest 3.24 3.59 3.90 4.13
Expense
Earnings 6.00 6.75 7.50 8.25
Before
Income
Taxes
Income Tax 1.62 1.82 2.02 2.23
Net Income 4.38 4.93 5.47 6.02
Changes in Pacific Grove Spice Company’s Balance Sheet due to sponsoring the
TV show

Assets 06/30/12 06/30/13 06/30/14 06/30/15

Cash $15.973 $16.595 $17.193 $17.737
Accounts 20.791 23.360 25.825 28.076
Receivable
Inventories 14.798 16.627 18.381 19.983
Prepaid 1.214 1.364 1.508 1.640
Expenses
Total Current 52.776 57.947 62.907 67.435
Assets
Net Property & 24.507 28.757 32.864 36.735
Equipment *
Other Long-Term 4.553 5.116 5.656 6.149
Assets
Total Assets 81.836 91.819 101.426 110.319
Liabilities &
Owners' Equity
Bank Notes 16.840 18.922 20.918 22.741
Payable
Accounts $4.865 $5.466 $6.043 $6.570
Payable
Current Portion 1.618 1.753 1.838 1.860
of Long-Term
Debt
Accrued 1.680 1.887 2.086 2.268
Expenses
Total Current 25.003 28.029 30.886 33.439
Liabilities
Long-Term Debt 24.258 26.286 27.561 27.879
Total Liabilities 49.261 54.315 58.447 61.318
Common Stock 6.881 6.881 6.881 6.881
New Stock Issue ( 2.362 2.362 2.362 2.362
MV of new stock)
Premium on 8.638 8.638 8.638 8.638
stock ( BV of
stock)
Retained 14.696 19.625 25.099 31.120
Earnings
Total 32.578 37.507 42.981 49.001
Shareholder
Equity
Total Liabilities & 81.839 91.821 101.428 110.319
Net Worth
Que 4- Should Pacific issue new common stock to the external investment
group?

Ans- An Investment group is willing to purchase 400,00 shares at $27.5 per share if
Pacific Grove Spice’s management decides to go ahead with this option they will end up
raising $11 million in new capital and If the management uses the entire $11 million to
pay of the debt then it’s Equity Multiplier would go down to 2.13 and the total debt to
around 44% of its total assets by June-2012. The table below gives a breakdown of its
equity multiplier and its total debt with respect to total assets and owner’s equity if the
firm decides to use the entire $11 million to replay the banks loan. Financial ratios given
as under –
6/30/2011 6/30/2012
Equity Multiplier 3.47 2.15
Total Debt (Millions) 37.17 30.309
Debt as % of Total Assets 62% 44.6%
Debt as % of Owners 216% 96%

Pacific Grove Spice Company Balance sheet after issuing 40000 new stock

Assets 06/30/11 06/30/12 06/30/13 06/30/14 06/30/15

Cash $4.10 $4.672 $5.61 $6.89 $8.13
Accounts $16.63 $19.13 $21.61 $23.99 $26.15
Receivable
Inventories $11.88 $13.61 $15.38 $17.07 $18.61
Prepaid $0.97 $1.12 $1.26 $1.40 $1.53
Expenses
Total $33.58 $38.88 $43.86 $49.36 $54.42
Current
Assets
Net Property $22.40 $25.16 $28.43 $31.55 $34.40
&
Equipment *
Other Long- $3.64 $4.19 $4.73 $5.25 $5.73
Term Assets
Total Assets $59.62 $67.874 $77.02 $86.17 $94.54
 Growth rate $0.14 $0.13 $0.12 $0.10
of assets
Liabilities &
Owners'
Equity
Bank Notes $13.44 $15.49 $17.51 $19.43 $21.18
Payable
. $3.91 $4.48 $5.06 $5.61 $6.12
Accounts
Payable
Current $1.48 $1.61 $1.02 $1.11 $1.14
Portion of
Long-Term
Debt
Accrued $1.35 $1.55 $1.75 $1.94 $2.11
Expenses
Total Current $20.18 $23.13 $25.33 $28.09 $30.55
Liabilities
Long-Term $22.25 $13.20 $15.26 $16.61 $17.03
Debt
Total $42.42 $36.33 $40.59 $44.71 $47.58
Liabilities
Common $6.88 $17.88 $17.88 $17.88 $17.88
Stock
Retained $10.32 $3.661 $18.56 $23.58 $29.08
Earnings
Total $17.20 $31.542 $36.44 $41.46 $46.96
Shareholder
Equity
Total Liabilities $59.62 $67.874 $77.02 $86.17 $94.54
& Net Worth
Pacific Grove Spice Company Income sheet after issuing 40000 new stock

Income 06/30/11 06/30/12 06/30/13 06/30/14 06/30/15

Statement
Net Sales $80.940 $93.081 $105.182 $116.751 $127.259
Cost of 47.512 54.452 61.531 68.300 74.447
Goods
Sold
Gross 33.428 38.629 43.650 48.452 52.813
Profit
Margin
R&D 1.295 1.489 1.683 1.868 2.036
Expense
SG&A 26.063 29.321 33.132 36.777 40.087
Expense
Earnings 6.070 7.819 8.835 9.807 10.690
Before
Interest &
Taxes
Interest 2.817 2.753 2.614 2.926 3.156
Expense
Earnings 3.253 5.065 6.222 6.881 7.534
Before
Income
Taxes
Income 0.879 1.368 1.680 1.858 2.034
Taxes
Net 2.374 3.698 4.542 5.023 5.500
Income