Statement of the Problem In July 2011, Pacific Grove Spice Company (Pacific Grove) is experiencing a major problem regarding the large amount of debt it has accumulated in the following years. Debra Peterson, CEO of Pacific Grove, is envisioning on solutions to "reduce interest-bearing debt to less than 55% of total assets and the equity multiplier to be less than 2.7 times by June 30, 2012" (Pacific Grove Spice Company Case, p. 3). Currently, Pacific Grove has a total debt of $37.172 million, equal to 62% of total assets and 216% of owners' equity.
Concurrently, Peterson and Hodges (CFO) are evaluating three opportunities. First, Pacific Grove should accept an offer from a cable cooking network to produce and sponsor a new program. Second, it should raise new equity capital by selling shares of common stock. Third, it should acquire High Country Seasonings that has sales revenue approximately 22% of Pacific Grove. …show more content…
This will allow to increase the company's net sales, profit margin and cash flows. In current market conditions, Pacific Grove is struggling to compete with its competitors, McCormick & Company and ConAgra Foods. Despite the immense growth in sales, Pacific Grove's competitors have higher net profit margins (Exhibit 6). The television program will allow the company to boost its sales and reach international markets.
Furthermore, by sponsoring the program, Pacific Grove will have a positive NPV with an IRR of 41.28% (Exhibit 3). The initial investment to sponsor the program will be $1,440,000 and other maintenance expenses in future years. However, by using the lowest WACC of 10%, the project produces an NPV of $3,278,174, which makes it profitable. Also, higher WACC's of 20% and 30% produce positive NPV and increase cash flows for Pacific Grove (Exhibit