Pacific Grove Spice Company

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PACIFIC GROVE SPICE COMPANY

William E. Fruhan; Craig Stephenson

• DESCRIPTION
• SUPPLEMENTAL MATERIAL
  

Description

Pacific Grove Spice Company is a profitable, rapidly growing manufacturer, marketer, and distributor of quality spices and seasonings. The company's business model requires significant investment in accounts receivable, inventory, and fixed assets to support sales. Although the company is profitable and all of its net income is reinvested in the firm, the firm must utilize significant amounts of debt to fund the necessary growth in assets to support sales. The bank is concerned about the total amount of interest-bearing debt on Pacific's balance sheet and has asked the company to provide a plan to reduce it. Debra Peterson, president and CEO, believes the current four-year financial projections are reasonable and attainable. She is also considering three opportunities: sponsoring a cable cooking show, raising new capital by selling shares of common stock, and acquiring a privately owned spice company. Students must analyze the company's financial projections to determine if the reduction in debt meets the bank's requirements. They must also analyze the opportunities and consider their individual and combined impacts on the company's financial position. The case illustrates the interaction between investment and financing decisions. This multifaceted case can be taught in a single class session or extended over several sessions and can be used as a final exam for an introductory MBA-level Finance course.

Learning objective:

1. Practicing using the tools of financial analysis including financial projections, ratio analysis, funding requirements, and debt constraints and covenants. 2. Illustrating the loss to existing shareholders created by issuing new common stock. 3. Reviewing the valuation of an entire company, including the appropriate risk-adjusted costs of capital and free cash flows to investors. 4. Considering capital structure issues, the value of financial flexibility, the costs of financial distress, and financial policy and execution. 5. Understanding alternatives for issuing new common stock. 6. Understanding the close interaction between investment and financing decisions.

Subjects Covered:

Acquisitions; Business models; Capital budgeting; Capital costs; Capital expenditures; Cash flow; Debts; Investments; Loans; Market opportunities; Retail; Securities analysis; Valuation

Setting:

• Geographic: United States
• Industry: Food
• Event Year Begin: 2011
  

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