Pacific Groove Spice Company specializes in selling food, spices, teas, and coffees. The company has experienced significant growth due to increased public awareness of diet and flavor. Consequently, it is actively seeking funding for accounts receivable, inventory, and fixed assets. The main source of funding for the company is the Bank, which has requested a decrease in the debt to asset ratio below 55% to continue providing the loan. Although equity issuance could be considered for raising funds, transaction costs have reduced the sale price to $27.50 compared to the market price of $32.50. Nevertheless, given the urgent need for funds at this stage of the business, these costs can be ignored.
In addition to equity issuance, Pacific Groove Spice Company is also contemplating producing a TV cooking show with a feasibility analysis demonstrating an impressive 41% internal rate of return. Furthermore, CEO Debra Peterson is seriously considering acquiring a similar-sized business like “High Country Seasonings”, although she needs to ensure that the offered purchase price is reasonable.
The CEO is assessing various options that can help maximize shareholder wealth and support business expansion.
High Country Seasonings presents both an investment opportunity and a financing opportunity. The question is whether Pacific should acquire this company. When considering the investment opportunity, the following approach is suggested:
(a) Project the Income Statement and Balance Sheet for High Country for the years 2012-2015.
(b) Calculate the free cash flow to investors for High Country.
(c) Determine if High Country’s valuation is higher than the acquisition cost for Pacific.
(d) Assess if it is advisable for Pacific to acquire High Country from an investment perspective.
4. What are the advantages of Pacific acquiring High Country from a financing standpoint? The suggested approach is to complete the following tasks: (a) Prepare financial statements for the combined Pacific/High Country entity, including the given assumptions for interest expense, goodwill, and liability/owner’s equity accounts; (b) Forecast financial statements for the combined entity for the years 2012-2015; and (c) Determine whether Pacific should acquire High Country based on its financing perspective.
What is Pacific’s recommended course of action regarding the television program project, the equity issue of 400,000 shares of stock, and the potential acquisition of High Country? Support your answer.
The company should explore ways to minimize its reliance on working capital financing. They should investigate potential avenues for enhancing the efficiency of their supply chain and improving their forecasting, which would enable them to decrease inventory levels. Additionally, they ought to consider negotiating with suppliers to secure lower rates for inventory purchases. Pacific Grove should also assess the possibility of extending the payment terms for their accounts payable. Even if this requires paying a slightly higher price, as long as the APR is lower than the interest rate charged by banks, it could assist in saving money and reducing capital requirements. Furthermore, they should evaluate if adjustments can be made to their credit policy terms in order to shorten the time taken for customer payments. By reducing receivables and increasing payables, they will be able to reduce their reliance on bank financing through notes payable and subsequently lower their interest-bearing debt.
