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Pacific Grove Spice Company

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on 9 May 2014

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Transcript of Pacific Grove Spice Company

Team members
High Country's Seasoning Income Statement
Capital budgeting analysis of television program opportunity
Forecast the balance sheet
Forecast income statement
EBIT/Sales stabilizes to 8.4% as mentioned in the text.
High Country Seasonings: 14.535 mio dollar (implied equity value) > 13.2 mio dollar (sales price)
Cable Cooking Network
No need to accept offer from investment group
Céline Audoore
Quinten Botte
Bert Claeys
Hanne Dossche
Evrard Vervaecke

1e master HIR finance 2013-2014

Pacific Grove Spice Company
equity multiplier < 2.7% => 2.4%
interest-bearing debt < 55% => 50%
Additional credit from bank
High Country Seasonings Balance Sheet
‘Peterson anticipated that cash would equal 20 days of operating expenses, accounts receivable would be 75 days of sales, both inventory and net property & equipment would turn over 4 times, prepaid expenses would be 1.2% of sales, and other long-term assets would equal 4.5% of sales.’
Balance Sheet: liabilities
‘For the liabilities accounts, accounts payable would equal 30 days of COGS, and accrued expenses would be 1.66% of sales.’
Cash = (20/365)* operating expenses. For the last number, we subtract a certain amount because bank notes are converted in cash. This is the amount that was mentioned for bank notes payable in 2015. This was a negative value, which is impossible for bank notes payable. This amount is converted in cash.
Accounts receivables = (75/365)* net sales (exhibit 5).
Inventories = COGS (exhibit 4)/4.
Net property and equipment = net sales (exhibit 4)/4.
Prepaid expenses = 0.012*COGS (exhibit 4).
Other long-term assets = 0.045*net sales (exhibit 4).
- Bank notes payable: PLUG. This number should always be positive. Because it is the plug, we can calculate this number by first calculating all the other numbers. We subtract accounts payable, current portion of long-term debt, accrued expenses, long-term debt and total shareholder equity from the total assets. The last number is 0.
- Accounts payable = (30/365)* COGS (exhibit 4).
- Current portion of long-term debt and long-term debt = 0. There is no loan.
- Accrued expenses = 0.0166*net sales (exhibit 4).
- Common stock does not change during the years.
- Retained earnings = retained earnings last year + net income this year (exhibit 4)..
- Operating expense = R&D expense (exhibit 4) + SG&D expense (exhibit 4) +COGS (exhibit 4)*part COGS in operating expense. From 2012 to 2015, we use the average of the previous 4 years.
- Debt = bank notes payable + current portion of long-term debt + long-term debt
Free Cash Flow calculation
Valuation High Country Seasonings
‘For the valuation of High Country Seasonings you can assume a WACC of 7.72% and a LT growth rate equal to the equilibrium sales growth.’ ‘She anticipated High Country’s revenues would grow by 7% in year 1, 6% in year 2, 5% in year 3 and 4.8% in later years.’
Terminal value in year 2015 is: FCF2015 * (1 + gL) / (WACC – gL). The gL is the LT free cash flow growth rate.
WACC > the long term growth rate: OK
We use two discounting methods: year-end and mid-year discounting. The formula NHW (netto huidige waarde) is applied here. We have to add a small correction for the mid-year discounting because the NHW formula is for year-end discounting.
Year-end: NPV = sum(FCFt / (1 + WACC)^t
Mid-year: NPV = sum(FCFt / (1 + WACC)^(t-1/2)
Sensitivity Analysis
In the text they mentioned we should take the deal if the value is higher than 13,2 million dollar. We added a sensitivity analysis on implied equity value by mid-year discounting. The valuation of the company stays higher than the price Pacific would pay for unless the WACC rises above 7,7% and the growth rate falls below 4,60%.
Selling common stock
Pacific + High Country
Income Statement
Balance Sheet
Free Cash Flow Calculation
Pacific + Cable Cooking
Income Statement
Balance Sheet
Free Cash Flow Calculation
Pacific + High Country + Cable Cooking
Income Statement
Balance Sheet
Calculation Goodwill
Free Cash Flow Calculation
1. Pacific
2. Decision
3. Cable Cooking
4. High Country
5. Valuation
6. Selling common stock
7. Pacific + High Country
8. Pacific + Cable Cooking
9. Pacific + High Country + Cable Cooking
Full transcript