What is the possible reason for the current pressure from the bank to reduce the debt level in 2011?
While it is notable that Pacific Grove has made substantial growth in sales as evidenced by the financial statements, clearly, the increased costs of financing long -term financing has served to water down the gains made on returns (Brigham and Ehrhardt, 2010). From the income statements, the cost of financing long-term debts has been on a rising trend. For instance, in 2007, the company paid 2.9 million as interest expense. Although the cost reduced substantially between 2008 and 2010, the company continued to witness a steady rise beginning in 2011. In the financial year ended 2012, Pacific Company experienced a rise, which rose by $0.4 million.
While the company continues to make progress in increasing the overall sales and return on assets, there is still a challenge of the ever-increasing costs of financing. For example, the projected position of the company’s sales indicates the company will increase sales by approximately four times. This can be explained by the fact that the company shall have increased its external funding, which stimulates the generation of earnings. However, the earnings on funding are often neutralized by the increased cost (Wahlen, Stickney, Baginski, and Bradshaw, 2011). This indicates that the pressure mounting on the company emanates from the inability of the company to handle high costs (Brigham and Ehrhardt, 2010).
The scenario shows that although the company’s sales returns were lower in 2007, the company managed to handle the debts due to the low financing costs.
The analyses of Pacific’s financial statements indicate that the company has improved its debt ratios from 2007. The analysis shows that the company has made strategic progress on the equity multiplier. Using the statements, the equity multiplier has been reduced by 0.11 to attain a figure of 3.45 compared to the 3.56 registered in 2008. While it is evident that the equity multiplier increased by 0.06 in 2008 from 3.50 obtained in 2007, the results obtained indicate that the company has recorded a steady reduction of the multiplier, which lends itself as a desired trend is proposed by the lending groups (banks). This means that the company has been improving the debt levels as expected by the bank.
The generation reducing debt-equity from 249% in 2007 to a low of 16% in 2012 indicates that the company will be able to achieve its future projections of generating the desired level. Using the results of the ratio analysis, the report indicates that Pacific Grove is headed in the right direction of a moderate level of debt financing that will be able to handle the ever-increasing pressure to manage its financing costs. With the adoption of the strategy to reduce debts that are pegged on the high-interest expense, the company will reduce the time’s interest earned to achieve the company’s future performance.
Should Pacific produce and sponsor the new television program? Is this attractive?
The capital budgeting statements of Pacific Company shows that increasing the advertising expenses bears incremental net returns. The analysis, therefore, suggests that the company may engage in developing and sponsoring a new television campaign program. This observation draws from the premise that the projected cash flows are deemed to increase significantly with increased levels of advertisements. For instance, maintaining advertising cost at 11% of the company’s sales, the company yield better results arising from the increased publicity.
With advertising costs of 935,000 in year 2, the company can expect an incremental operating profit of 1.5 million compared to an operating profit of 1.59 obtained at an advertising cost of 982,000. Similarly, the projections suggest that the company can achieve an incremental profit of 1.8 million from an advertising cost of 1 million.
Therefore, the company should consider stepping up its advertising programs to continue increasing the overall returns. The statements reveal that the payback period of the investment in advertising would be approximately 1 year. Further, the analysis indicates that the internal rate of return of 41% is desirable. This is because the internal rate of return of this nature means that the company can expect to improve its value on investment by over 41% in its future operations (Brigham and Ehrhardt, 2010).
Should Pacific issue new common stock to the external investment group? Will the equity issue be sufficient to bring the Pacific into compliance with the bank’s requirements?
By increasing the company’s common stock, the Pacific’s total shareholder equity will increase, thus reducing the overall debt-equity (Siddiqui, 2006). The results will automatically influence the company’s equity multiplier since the shareholder equity will be on an increasing trend as the total assets remain constant or increase at a lower rate. because the company has the pressure to achieve a lower equity multiplier, it would be desirable to pursue the option of increasing the capitalization by raising more capital by way of selling common stick to external investors. Also, the company is expected to reduce the high interest in holding loans and debts in the context of the challenging credit industry.
Therefore, the company can achieve this requirement by lowering external financing that has since been costly and embrace financing by common stock (Siddiqui, 2006). By increasing the total shareholder equity from 1.1 million to 12.77million, the Pacific improves its equity multiplier by 0.11. On the other hand, the equity debt improves by 10%in 2009 from 255% recorded in 2008. This is due to increased shareholder equity, an indication that increasing common stock would result in better results.
Should Pacific acquire High Country Seasonings? Is the stock swap a good choice? Based on your projections and analysis: Is this a good investment? Is this a good financing opportunity?
The method of share swaps or stock swaps is the best approach that the Pacific can use to finance its investment. Research indicates that when a company intends to avoid hostile takeovers by its competitors, share swaps become appropriate mechanisms. Therefore, Pacific Company can utilize this method as one of the position pill approaches used in circumstances in which the company finds itself. Using the projected results of the company, the Pacific finds itself in a better position to use stock swaps as an appropriate approach to investment.
This is because the company can influence the buying of shares at a negotiated discount that prevents the competitor from a takeover (Wahlen, Stickney, Baginski, and Bradshaw, 2011). Since the process does not involve complex transaction rules and costs compared to organizing for an initial public offering (IPO), this method provides the best financing opportunity for Pacific Grove Spice Company (Siddiqui, 2006).
Comparison of the actual performance, projections, and ratio analysis of Pacific Grove Spice Company and High Country Seasonings to the industry information
The company has lagged in terms of attaining the industry average in the years 2010 and 2011. From the analysis of the company, the results show that while the company has registered good results, they are still below the industry average. Considering the net sales revenue, the company has achieved less than 50 times below the leading company (McCormick) and ConAgra Foods Company. However, the good news is that the company has made incremental progress over the years. For instance, the company improved its price-earnings ratio from 14.7 in 2010 to 16 in 2011.
Compared with its industry competitors, Pacific has registered welcoming results in terms of equity beta. The comparison shows that while the leading companies recorded an equity beta of 0.5 and 0.6 respectively, Pacific Company registered 0.85.
Both Pacific and High Country Holdings have very low market capitalization. The results show that the Pacific Company recorded less share outstanding shares of less by 100% compared to leading competitors. The company should implement strategies aimed at improving the overall capital base and earnings to shareholders (Wahlen, Stickney, Baginski, and Bradshaw, 2011). This will stimulate the interest of external investors to increase their shareholding, which is required to cause a low equity multiplier and low debt pegged on high financing costs.
References
Brigham, E.F., and Ehrhardt, M. C., 2010. Financial Management Theory and Practice, New York: Cengage Learning.
Siddiqui, S. A., 2006. Managerial Economics and Financial Analysis, New Delhi: New Age International.
Wahlen, J.M., Stickney, C.P., Baginski, S.P., and Bradshaw, M., 2011. Financial Reporting, Financial Statement Analysis, and Valuation: A Strategic Perspective, New York: Cengage Learning.