Pacific Grove Spice Company

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? By looking at Pacific Grove Spice Company’s forecasted financial statements, we can conclude that its profitable operations are not sufficient enough for it to be able to comply with the bank’s requirements by 30 th June 2012. By the end of June-2012 Pacific Grover would only be able to lower its Equity Multiplier to 3.3 and its total debt would still be around 61% of its total assets. However, up on further analysis, we can conclude that Pacific Grove Spice would be able to comply with the bank’s requirements by 30 th June 2015. As by then it would be able to reduce its equity multiplier to 2.7 and its total debt would be around 55% of its total assets. The table below gives a breakdown of its equity multiplier and its total debt with respect to total assets and owners equity. 6/30/2011 Equity Multiplier Total Debt (Millions) Debt as % of Total Assets Debt as % of Owners Equity

3.47 37.17 62% 216%

6/30/201 2 3.30 41.31 61% 201%

6/30/201 3 3.15 45.52 59% 187%

6/30/201 4 2.97 48.89 57% 170%

6/30/2015 2.77 51.08 55% 153%

Should Pacific issue new common stock to the external investment group? A 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. 6/30/2011 Equity Multiplier Total Debt (Millions) Debt as % of Total Assets Debt as % of Owners Equity

3.47 37.17 62% 216%

6/30/201 2 2.13 29.58 44% 93%

6/30/201 3 2.11 33.78 44% 93%

6/30/201 4 2.08 37.15 43% 90%

6/30/2015 2.01 39.34 42% 84%

Attached below is Pacific Grover’s Projected Balance sheet and Income statement after they issue a new capital worth $11 million to a investment group.

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 Accounts Receivable Inventories Prepaid Expenses Total Current Assets

$4.10 $16.63 $11.88 $0.97 $33.58

$5.03 $19.13 $13.61 $1.12 $38.88

$5.61 $21.61 $15.38 $1.26 $43.86

$6.89 $23.99 $17.07 $1.40 $49.36

$8.13 $26.15 $18.61 $1.53 $54.42

Net Property & Equipment * Other Long-Term Assets Total Assets

$22.40 $3.64 $59.62

$25.16 $4.19 $68.23

$28.43 $4.73 $77.02

$31.55 $5.25 $86.17

$34.40 $5.73 $94.54

$0.14

$0.13

$0.12

$0.10

$40,724.0 0

$41,090.0 0

$41,455.0 0

$41,820.0 0

$42,185.00

Bank Notes Payable Accounts Payable Current Portion of Long-Term Debt Accrued Expenses Total Current Liabilities

$13.44 $3.91 $1.48 $1.35 $20.18

$15.49 $4.48 $1.61 $1.55 $23.13

$17.51 $5.06 $1.02 $1.75 $25.33

$19.43 $5.61 $1.11 $1.94 $28.09

$21.18 $6.12 $1.14 $2.11 $30.55

Long-Term Debt Total Liabilities

$22.25 $42.42

$13.20 $36.33

$15.26 $40.59

$16.61 $44.71

$17.03 $47.58

Common Stock Retained Earnings Total Shareholder Equity

$6.88 $10.32 $17.20

$17.88 $14.01 $31.90

$17.88 $18.56 $36.44

$17.88 $23.58 $41.46

$17.88 $29.08 $46.96

Total Liabilities & Net Worth

$59.62

$68.23

$77.02

$86.17

$94.54

Growth rate of assets Liabilities & Owners' Equity

Pacific Grove Spice Company Income sheet after issuing 40000 new stock Income Statement Net Sales Cost of Goods Sold Gross Profit Margin

06/30/11

06/30/12

06/30/13

06/30/14

06/30/15

$80.940 47.512 33.428

$93.081 54.452 38.629

$105.182 61.531 43.650

$116.751 68.300 48.452

$127.259 74.447 52.813

1.295 26.063 6.070

1.489 29.321 7.819

1.683 33.132 8.835

1.868 36.777 9.807

2.036 40.087 10.690

Interest Expense Earnings Before Income Taxes

2.817 3.253

2.753 5.065

2.614 6.222

2.926 6.881

3.156 7.534

Income Taxes Net Income

0.879 2.374

1.368 3.698

1.680 4.542

1.858 5.023

2.034 5.500

R&D Expense SG&A Expense Earnings Before Interest & Taxes

Should Pacific acquire High Country Seasonings? 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 $3.2 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. Equity Multiplier Total Debt (Millions) Debt as % of Total Assets Debt as % of Owners Equity

6/30/2012 2.43 42.61 51% 123%

6/30/2013 2.38 46.28 49% 117%

BV Per Share MV Per Share Outstanding Shares New Shares Issued BV of New Shares MV of New Shares Total Shareholders Equity Goodwill

6/30/2014 2.29 49.02 48% 109%

6/30/2015 2.20 51.08 46% 100%

$5.91 $32.6 1165327.00 404908.00 $2,393,006.28 $13,200,000.80 $9,724,000.00 $3,476,000.80

Pacific Grove Spice Company Balance Sheet after acquiring High Country Seasonings Assets

06/30/12

06/30/13

06/30/14

06/30/15

Cash Accounts Receivable Inventories Prepaid Expenses Total Current Assets

$5.397 22.988 16.502 1.343 46.230

$6.048 25.706 18.296 1.501 51.551

$6.668 28.288 20.134 1.652 56.742

$7.809 30.653 21.818 1.790 62.070

Net Property & Equipment * Other Long-Term Assets Goodwil; Total Assets

29.855 5.035 3.400 $84

33.407 5.629 3.400 $94

36.783 6.195 3.400 $103

39.875 6.713 3.400 $112

$16.792 5.426 1.614

$18.266 6.015 1.751

$19.562 6.620 1.842

$21.181 7.173 1.869

1.857 25.689

2.077 28.110

2.285 30.309

2.477 32.700

24.204 49.893

26.258 54.368

27.614 57.923

28.028 60.728

Liabilities + Owners' Equity Bank Notes Payable Accounts Payable Current Portion of Long-Term Debt Accrued Expenses Total Current Liabilities Long-Term Debt Total Liabilities

Common Stock New Stock Retained Earnings Total Shareholder Equity Total Liabilities & Net Worth

6.881 13.200 14.470 34.551 84

6.881 13.200 19.390 39.471 94

6.881 13.200 24.890 44.971 103

6.881 13.200 30.950 51.031 112

Pacific Grove Spice Company Income Statement after acquiring High Country Seasonings Income Statement

06/30/13

06/30/14

06/30/15

$111.874 66.010 45.864

$125.103 73.185 51.918

$137.669 80.536 57.132

$149.180 87.270 61.910

1.677 34.977 9.210

2.002 39.407 10.509

2.203 43.366 11.564

2.387 46.992 12.531

Interest Expense Earnings Before Income Taxes

3.317 5.892

3.657 6.852

3.926 7.638

4.129 8.403

Income Taxes Net Income

1.591 4.301

1.850 5.002

2.062 5.576

2.269 6.134

Net Sales Cost of Goods Sold Gross Profit Margin R&D Expense SG&A Expense Earnings Before Interest & Taxes

06/30/12

Should Pacific produce and sponsor the new television program?

If yes, how should

Pacific finance the necessary investment? 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. Equity Multiplier Total Debt (Millions) Debt as % of Total Assets Debt as % of Owners Equity

6/30/2012 2.51 42.72 52% 131%

6/30/2013 2.45 46.96 51% 125%

6/30/2014 2.36 50.32 50% 117%

6/30/2015 2.25 52.48 48% 107%

Changes in Pacific Grove Spice Company’s Income Statement due to sponsoring the TV show Income Statement Net Sales Cost of Goods Sold Gross Profit Margin R&D Expense SG&A Expense Promotion Expense at 11% of

06/30/12

06/30/13

06/30/14

06/30/15

101.18 59.19 41.99

113.69 66.51 47.18

125.68 73.52 52.16

136.64 79.93 56.70

1.49 30.08 0.89

1.68 33.93 0.94

1.87 37.62 0.98

2.04 40.97 1.03

sales Depreciation Expense Earnings Before Interest & Taxes

0.29 9.24

0.29 10.34

0.29 11.40

0.29 12.37

Interest Expense Earnings Before Income Taxes

3.24 6.00

3.59 6.75

3.90 7.50

4.13 8.25

Income Tax Net Income

1.62 4.38

1.82 4.93

2.02 5.47

2.23 6.02

Changes in Pacific Grove Spice Company’s Balance Sheet due to sponsoring the TV show Assets Cash Accounts Receivable Inventories Prepaid Expenses Total Current Assets Net Property & Equipment * Other Long-Term Assets Total Assets Liabilities & Owners' Equity Bank Notes Payable Accounts Payable Current Portion of Long-Term Debt Accrued Expenses Total Current Liabilities Long-Term Debt Total Liabilities

06/30/12

06/30/13

06/30/14

06/30/15

$15.973 20.791 14.798 1.214 52.776

$16.595 23.360 16.627 1.364 57.947

$17.193 25.825 18.381 1.508 62.907

$17.737 28.076 19.983 1.640 67.435

24.507 4.553 81.836

28.757 5.116 91.819

32.864 5.656 101.426

36.735 6.149 110.319

06/30/12 16.840 $4.865 1.618 1.680 25.003

06/30/13 18.922 $5.466 1.753 1.887 28.029

06/30/14 20.918 $6.043 1.838 2.086 30.886

06/30/15 22.741 $6.570 1.860 2.268 33.439

24.258 49.261

26.286 54.315

27.561 58.447

27.879 61.318

Common Stock New Stock Issue ( MV of new stock) Premium on stock ( BV of stock) Retained Earnings Total Shareholder Equity

6.881 2.362

6.881 2.362

6.881 2.362

6.881 2.362

8.638 14.696 32.578

8.638 19.625 37.507

8.638 25.099 42.981

8.638 31.120 49.001

Total Liabilities & Net Worth

81.839

91.821

101.428

110.319