Balance Sheet and High Country Essay
Pacific Groove Spice Company is a company that sells a selection of food, spices, teas and coffees. Due to ever increasing awareness regarding diet and flavor in public, the company has experienced tremendous growth and is in constant need of funds. Debra Peterson, the CEO of the company, is evaluating different options to raise the funds required to invest in accounts receivable, inventory and fixed assets. Need for funds became more critical when the chief supplier of funds to the company, the Bank, asked the company to decrease the debt to asset ratio so that it remains less than 55 % by the next year to continue availing the loan from the bank.
Raising funds through equity issuance is an option but since the transaction costs associated with a small scale arrangement have reduced the sale price to $ 27.50 as compared to market price of $ 32.50, this option may not be ideal. But the need for funds is so crucial at this stage of business that such costs can be ignored.
Company is also considering producing a TV cooking show. Feasibility analysis of this project has very convincing reasons to approve the project i.e. IRR is 41 %. Another source of finance and business expansion for the company is the acquisition of a business of comparable size. Debra is very seriously considering acquiring “High Country Seasonings” but she has to establish that the purchase price offered is reasonable. The CEO is evaluating different options that can help the company to maximize the shareholder’s wealth
3.High Country Seasonings is both an investment opportunity and a financing opportunity. Should Pacific acquire High Country Seasonings? Suggested approach – investment opportunity:
(a)Forecast High Country’s Income Statement and Balance Sheet for 2012-2015. (b)Determine High Country’s free cash flow to investors.
(c)Is High Country’s valuation greater than what Pacific must pay to acquire the firm? (d)From an investment standpoint, should Pacific acquire High Country?
4.From a financing standpoint, what are the advantages of Pacific acquiring High Country? Suggested approach – financing opportunity: (a)Prepare financial statements for the combined Pacific/High Country (b)Forecast financial statements for 2012-15 for the combined entity. Use the
assumptions given in the case for interest expense, goodwill, and the liability/owner’s equity accounts (c)From a financing standpoint, should Pacific acquire High Country?
5.What is your final recommended course of action for Pacific regarding the television program project, the equity issue of 400,000 shares of stock, and the potential acquisition of High Country? Provide support for your answer.
The company should explore ways to reduce its need for working capital financing. They should see if there are ways of improving their supply chain efficiency and forecasting so that they can reduce their inventory levels. They should look to negotiate with suppliers to reduce the rate they are paying for inventory. Pacific Grove should also see if they can extend the length of their accounts payable. Even if they have to pay a slight price premium, if the rate (APR) is less than what the banks are charging them in interest, it could help to both save money and reduce their capital needs. They should also see if they can adjust the credit policy terms with their customers to shorten the number of days before payment. By reducing receivables and increasing payables they should be able to reduce their financing needs from the bank in notes payable and thus lower their interest-bearing debt.