Pacific Grove Spice Company

Steps to Completing Case Study

1. Complete Ratios for Exhibit 1 and 2. The Key ratios are equity multiplier
(total assets/total equity), interest bearing debt/total assets, times interest
earned and for the lending limit – bank notes payable/receivables (must be
less than 81%). Remember bank wants equity multiplier to be no more than
2.7 times and interest bearing debt to total assets to be less than 55%.

2. Analyze the TV concept. You will see a very positive IRR. However, as you
can see the change in net working capital and the cost of the project would
cause Pacific to be even more offside the bank’s requirements

3. Analyze whether Pacific should issue equity at a price lower than market
price. You will determine the impact on the current and pro forma (i.e.,
2012) ratios and the cost to the existing shareholders in terms of value
surrendered.

4. Forecast the income statement of High Country. You only need to forecast to
the EBIT line.

5. Forecast balance sheet for High Country. Forecast all asset accounts and only
accounts payable and accrued liabilities on the liability side (so that you can
obtain net working capital changes)

6. Calculate Free cash flows and terminal value of High Country using their
stated perpetuity for the terminal value of 4.8%. Note that cash is included in
working capital changes.

7. Calculate the WACC of High Country – you can use the current debt/equity
ratio and the comps from Exhibit 6 plus the other information in that exhibit.
Then go back and calculate the value of the equity of High Country and
conclude whether the transaction makes sense. (use ultimately a WACC of
7.72%)

8. Assuming that you agree that the transaction makes sense, forecast the
income statement and balance sheet of the combined High Country and
Pacific combined. Calculate the required 4 bank ratios to ensure that the
combined company is onside.

9. Take the combined balance sheet and income statement and re-forecast them
with the TV show included. The point is, if the TV show makes sense, which
it clearly does, can we do it with the combined balance sheet of the two
merged companies plus the TV show and still meet the bank’s requirements?

10. Conclude as to the direction Pacific Grove should take