FINAL INTEGRATED

PROJECT
PA C I F I C G R O V E S P I C E C O M PA N Y
B y, C L A S S 2 – T E A M 2
M. SAMEER KUMAR
S A N J AY D AV E
P R A S H A N T S R I VA S TAVA
RAVI DUSAD
Executive Summary
• Pacific Grove Spice Company has started its business as a small grocer on the
Monterey Peninsula of California during the 1980s’ by selling a selection of food,
coffees, teas and spices. Gradually their founders have expanded their offerings of
spices to support a broader range of international cuisines.
• After reaching its 25th anniversary, the company reputation, sales and orders
shipped has covered all the 50 states. As the company has grown formidably, its
retained earnings were not sufficient to the fund the growth to support the ever-
increasing sales.
• Therefore, they were dependent on a large regional bank which has supported by
way of short term notes payable which are backed with company’s account
receivable along with long term debt supported by the firm’s assets.

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• By the end of the fiscal year 2011, the company’s total debt was at $ 37.172 million with an equity
multiplier of 3.47 times and times interest, which was earned at 2.15 times.
• But due to the recent financial crisis during 2008, banks are under immense pressure from
regulators to limit the exposure to avoid potential losses.
• Therefore, the bank has conveyed to Darby Peterson who is the Chief Operating Officer that they
want to have an action plan from the company to reduce the interest-bearing debt to less than
55% of total assets and also the equity multiplier to be less than 2.7 times by June 30, 2012.
• And if the requirements are not met on time, the bank would not extend any additional credit to
Pacific Grove Spice Company which may force the company to choose the new source of funding.
• But looking into the stringent timelines given by the bank, the company must do something more
aggressive to reduce interest-bearing debt levels. The company must discover alternatives to
lessen its need for working capital financing. At the scenario, Peterson and her team are looking
for three opportunities:
• Can Pacific Grove Spice Company take an offer from a cable cooking network to produce and sponsor
new program?
• Whether the company can raise new capital by selling shares of common stock?
• Or should Pacific Grove Spice Company acquire High Country Seasonings which has sales revenue, which
is approximately equal to 22% of Pacific’s?
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CASE QUESTIONS
Question 1: Based on Pacific Grove Spice Company's forecasted financial statements, are its
profitable operations sufficient to quickly bring it into compliance with the banks' requirements?
• After going through the Pacific Grove Spice Company’s forecasted financial statements, we can
conclude that the company cannot achieve the targets set by the bank within the stipulated time
frame, i.e., 30th Jun 2012.
• By the end of June-2012, Pacific Grover can reduce its equity multiplier to 3.3, and its total debt to
assets would be 61% only. However, the Pacific Grove Spice company can accomplish its set target
by the bank only by 30th June 2015.
• By that time, the company would be able to reduce its equity multiplier to 2.7, and its total debt
would be around 55% of its total assets. The below table is the breakdown of its equity multiplier
and its total debt concerning total assets and owners’ equity.

30-Jun-11 30-Jun-12 30-Jun-13 30-Jun-14 30-Jun-15

Total Debts for the Company 37.172 41.311 45.516 48.888 51.078

Equity Multiplier 3.47 3.30 3.15 2.97 2.77

Debt as % of Total Assets 62% 61% 59% 57% 55%

Debt as % of Owners Equity 216% 201% 187% 170% 153%

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Question 2: Should Pacific Grove Spice Company acquire High Country Seasonings? Is the acquisition
of High Country an excellent investment opportunity? What are the free cash flows, risk-adjusted
cost of capital and value? Is it a positive NPV decision for Pacific? Can the acquisition be made and
still enable Pacific Grove to meet the banks' requirements?
• Acquisition of High Country seasoning is the best alternative among the three
options as it decreases the overall financial leverage of the company. After
consolidation, equity multiplier has reduced to 2.45 times and interest-bearing
debt as a percentage of total assets has gone down to 49% both of which are well
below the target set by the bank.
• After discounting the expected free cash flows from the acquirement at the cost of
capital of 8.03 %, the enterprise value of total purchase comes out to be $ 39.14,
which is a positive NPV.
• WACC used here 8.03 % with the cost of equity of 9%. Equity beta coefficient,
which is used here is the average of the equity beta coefficient of the industry. As
High Country involves less debt, the cost of the debt used is 7.25 % (prime interest
rate + 4 %).
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• This purchase will help the Pacific Grove Spice company to accomplish encouraging
cash flows as sales would produce at an increasing rate when High Country’s spices
and seasoning would be added to the more extensive and active promotion and
supply network of the Pacific Grove Spice company.
• After calculating projected cash flows and consolidated financial statements, it can be
concluded that this procurement of High Country Seasonings’ can prove valuable for
the Pacific Grove Spice company, and it can also help to accomplish its targets much
better than the other two scenarios within the stipulated time frame set by the bank.

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Consolidated Balance Sheet Statement of PACIFIC GROVE SPICE COMPANY and
HIGH COUNTRY SEASONING from 2012 to 2015:

BALANCE SHEET 30-Jun-12 30-Jun-13 30-Jun-14 30-Jun-15

Total Current Assets 46.458 51.783 56.984 61.749

Total Assets 84.828 94.300 103.442 111.817

Total Current Liabilities 24.389 27.350 30.178 32.700

Total Liabilities 48.593 53.608 57.792 60.728

Total Shareholder Equity 34.612 39.596 45.122 51.186

Total Liabilities & Net Worth 83.205 93.203 102.914 111.914

TOTAL DEBT 41.311 45.516 48.888 51.078

Equity Multiplier 2.451 2.382 2.293 2.185

Debt to Asset Ratio 49% 48% 47% 46%

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Consolidated Income Statement of PACIFIC GROVE SPICE COMPANY and HIGH
COUNTRY SEASONING from 2012 to 2015:
INCOME STATEMENT 30-Jun-12 30-Jun-13 30-Jun-14 30-Jun-15
Net Sales $111.874 $125.103 $137.669 $149.180
Cost of Goods Sold $66.010 $73.185 $80.536 $87.270
Gross Profit Margin $45.864 $51.918 $57.132 $61.910

R&D Expense $1.677 $2.002 $2.203 $2.387

SG&A Expense $34.977 $39.407 $43.366 $46.992
Earnings Before Interest & Taxes $9.210 $10.509 $11.564 $12.531

Interest Expense $3.437 $3.682 $3.994 $4.224

Earnings Before Income Taxes $5.772 $6.827 $7.570 $8.308

Income Taxes $1.558 $1.843 $2.044 $2.243

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Net Income $4.214 $4.984 $5.526 $6.065
 Cost of Equity Calculation using CAPM
Risk-free Rate 4%
Equity Beta 0.65
Risk Premium 7% No. of shares 4,04,908
Cost of Equity 9%
Price per share in $ 32.60

Cost of debt Calculation

Price of Atwood Sisters for High Country 13.20
Prime Interest rate+ 4 % 7.25%

Book value of High country equity 4.584

WACC Calculation
Debt 22% Goodwill 8.616
Equity 78%
Tax Rate 27%
WACC 8.03%

NPV $39.14 10
References
• GlobalNxt University Study Material
• Ross, S. A., Wester field, R., Jaffe, J. F., & Jordan, B. D. (2019). Corporate finance.
New York: McGraw-Hill Education.
• Brigham, E. F., & Houston, J. F. (2019). Fundamentals of financial management.
Boston, MA, USA: Cengage.

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THANK YOU
CLASS 2 – TEAM 2