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Based on Pacific Grove Spice Companys forecasted financial statements, are its

profitable operations sufficient to quickly bring it into compliance with the banks
requirements?
By looking at Pacific Grove Spice Companys forecasted financial statements, we can
conclude that its profitable operations are not sufficient enough for it to be able to
comply with the banks 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 banks 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 Spices 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 its 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 owners 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 Grovers 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 Companys 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 Companys 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 Companys 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