Case Study Pacific Grove Spice Company

Conclusions and Recommendations: Pacific Grove Spice Company is currently unable to comply with the bank's requirements with their current financial performance. However, Pacific should choose a few options to meet these requirements: first, they should acquire High Country Seasonings for $13.2 million since this is well below the $18 million book value of their equity, and the total value of the company would increase from the financial statements' consolidation. In addition, Pacific should issue 400,000 new shares of common stock to the investment group to have money for funding the cooking television show. By financing the production and sponsorship of the show, Pacific will be able to meet the bank's regulations and reduce its total debt to less than 55% of its total assets and also reduce the equity multiplier to 2.5. Though issuing new shares will drop Pacific's stock price and likely displease the shareholders a bit, Pacific should still issue the new shares to the external investment group since it's a positive NPV project that will generate increased sales each year. The increased financial performance that would result from this …show more content…
If the company acquires High Country Seasonings, they will be able to meet the bank's obligations by the required June 30, 2012 date. With this acquisition, Exhibit 5 shows that Pacific will be enabled to reduce their debt as percentage of total assets to 51% and their equity multiplier to 2.43. For acquiring High Country Seasonings, Pacific will issue 404,908 new shares at the market price of $32.60 per share worth $13.2 million. Since the $13.2 million market value of Pacific's stock is less than the $18 million book value of High Country's equity, Pacific will achieve negative goodwill of $4,799,999.20. This negative goodwill means Pacific can purchase High Country at a bargain, so Pacific should accept the price of the company and acquire