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Pacific Grove Spice Company

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by

Avic Sese

on 22 November 2014

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Transcript of Pacific Grove Spice Company

Pacific Grove Spice Company

Agenda of the Board Meeting
Update on the firm's financial performance and position
Company dilemma
Alternatives to remedy dilemma
Conclusion
Accept TV Show Offering
Well-known cooking network approached Pacific to produce and sponsor them

Pacific Grove believed acceptance would generate positive impact

Sell New Common Shares of Stock
1,165,327 shares outstanding at $ 32.60
Investment group was willing to purchase 400,000 shares at $27.50
Acquire High Country Seasonings
HIGH COUNTRY SEASONINGS
-small successful firm
-privately held by Martha and Carol Atwood


The Current Situation
Strengths:
dominates region sales, good bank reputation, high quality receivables
Weaknesses:
high interest bearing debts, DR, EM and low TIE
Opportunities:
company can expand
Threats:
company's ability to finance its rapid growth could be crippled
Alternatives Available
Bank is willing to lend money if the firm:
1) reduces interest-bearing debt ratio to less than 55%
2) reduces equity multiplier to less than 2.7 times
Conclusion
Accept Alternative 2 - Sell shares of stock
return it offers is reasonable
complies with the conditions set by the local regional bank

Recommendation
Pacific Grove Spice Company should look for other alternatives
Partnership Opportunities Analyst
Equity Financing Analyst
Acquisition Opportunities Analyst
Right now...
"Commitment to highest quality and freshest spices"
At 25th year, distributed to over 50 states
90% of sales were to high-end grocery stores

The problem is...
Retained earnings
are
insufficient
to
fund the growth
in assets to support ever-increasing sales
However...
The local regional bank is willing to lend the additional funding needed.
Strike up a deal with a cable network
Partner with Lesley Buller
Raise New Equity
Sell $11 million of common stock to outside investors
Acquire another firm
High Country Seasonings
I.B. Debt Ratio
59.50% > 55%
Equity Multiplier
3.43 times > 2.7 times
I.B. Debt Ratio
52.64% < 55%
Equity Multiplier
2.5 times < 2.7 times
I.B. Debt Ratio
57.25 % > 55%
Equity Multiplier
2.34 times < 2.7 times
Pros
doesn't have to pay it back
long-term in nature
less-risky than other sources of financing
Con
a percentage of control and ownership is given up to the investors
increased chances of conflicts of interest
Debt Restructuring
The company could choose to negotiate with its current creditors to alter certain components of their obligation (e.g. reduce interest rate or extend term).
Other Financial Institutions
The company could choose to seek other institutions to help with their financing needs.
Based on Jim Harvey's speech structures
What if we do nothing?
Rely on decayed sales forecast
By 2015, bank demands are met

I.B Debt Ratio
55.04% ~ 55%
Equity Multiplier
2.77 times ~ 2.7 times
Batiles. Chung. Cordeta. Lim. Macalino
Pacific Grove Spice Company
Sales = $8 100 000
Growth rate of sales = 5% per year
Cost of goods sold = 58.5% of sales
Promotional expense = 11% of sales
General and administrative expenses = $760 000
with growth rate of 5% per year
Marginal income tax rate = 27%

Increase in NOWC
Accounts receivable = 75 days of sales
Inventory = turnover 4 times
Accounts payable = 30 days of COGS

Increase in CAPEX = $1 440 000


Sensitivity Analysis
Ratio Analysis
Rate of Return for Equity
Ratio Analysis
Shares of stock to be sold 400,000
Price adjusted for floatation $ 27.50
Increase in Assets and Equity $ 11,000,000

Willing to sell for $13.2 M
-16 times 2011 net income of $825,000
common-stock only transaction
-404,908 shares
-market price of $32.60
All accounts would be consolidated

Revenues are expected to grow by:
It is forecasted that account balances will be as follows in 2012:
Cash would be 20 days of OPEX
Net PPE would turnover 4 times
Prepaid Expenses would be 1.2% of sales
Other Long-Term Assets would be 4.5% of sales
Accrued Expenses would be 1.66% of Sales

To support growth in sales:
A/R would be 75 days of sales
Inventories would turnover 4 times
A/P would be 30 days of COGS

NPV
$ (27.46) million
IRR
-12%

Ratio Analysis
Ratio Analysis
Head Analyst
Associate Analyst
~
~
Full transcript