Questions
Pacific Grove Spice (Pacific) is a profitable, growing and levered firm. It has used debt to fund its growth, but its lenders are pressuring it to delever. It faces the opportunities of sponsoring and producing a new cooking program, raising new equity capital, and buying a smaller competitor.
This comprehensive case challenges you to integrate smart fundamental left-eye FSA with sensible valuation-based right-eye V, using tools that span the full range of topics covered in our FSAV course together. Be sensible in your forecasted financials and be sensible in your DCF valuation. Use end-of-year B/S numbers for ratios. You may go up to 12 pages. As you proceed, I encourage you to be a whale, think FSA, think V, and explicitly address both the costs and benefits of the business aspects that need to be analyzed individually and in total in Q3, Q4 and Q5. Also, remember that the templates I provide you in the accompanying Excel file are guides, not prisons, and that they do not necessarily represent all the Excel-based structures that you may find valuable to create or re-use in order to get really strong answers.
Good luck + I hope you enjoy the case!
Q0. Who is the key decision maker? What is the business problem facing him/her that can be improved through good FSAV? Who is tasked to help him/her, and why? (2 pts)
Q1. Has Pacific’s financial performance been strong, OK or poor over the 5-year window 7/1/06-6/30/11? (1 pt). Support your view with quantitative evidence, drawing on all that we’ve covered in FSAV. (3 pts)
Q2. Do Pacific’s projected financial statements as shown in Exhibits 1 and 2 of the case yield the expectation that Pacific will meet the interest-bearing debt percentage and equity multiplier figures demanded by its bank? Support your answer by showing calculations. (2 pts)
Q3. Should Pacific accept the offer from the well-known cooking network to sponsor and produce a new half-hour TV program? Support your answer with both quantitative and qualitative evidence. [Hint: Determine the incremental impacts on Pacific’s balance sheet if it goes ahead with sponsoring and producing the TV program] (3 pts).
Q4. Should Pacific raise new equity capital by selling 400,000 new common shares to the investment group at the net-of-costs price of $27.50 per share? ? Support your answer with both quantitative and qualitative evidence. (3 pts)
Q5. Should Pacific acquire High Country Seasonings for $13.2 million? In arriving at your answer, use DCF to arrive at your estimate(s) of the value of High Country Seasonings to PGS. Assume the balance sheet forecasts made by Peterson in the topmost para on p.6 pertain to end-of-year balances. Assume also that HCS’ WACC = 10% and Pacific’s WACC = 8.2%; ignore the “Exhibit 6 Comps + int rates” tab re: WACC. Lastly, for simplicity assume zero interest is earned on Cash. (7 pts)
