Pacific Grove

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Question 1: Based on the company’s forecasted financial statements, can the company quickly comply with the banks requirements? It depends on what you consider quickly. If the deadline is to only to have a plan ready by June 30th, 2012 then it looks like they can come pretty close without implementing any major changes. Just by following their expected future growth plans they will almost reach the requirements of the bank within 4 years. Using the information provided from their forecasted financials, by 2015 Pacific Grove will reach a 55% ratio of interest/bearing debt to total assets and their equity multiplier will be 2.77. (See Exhibit 1) Depending on how stringent the bank is this may not be quick enough of a timeline or progressive enough of a plan. If they want these figures lowered to the required levels by 2012 then Pacific Grove must do something more aggressive reduce interest bearing debt levels. The company should explore ways to reduce its need for working capital financing. They should see if there are ways of improving their supply chain efficiency and forecasting so that they can reduce their inventory levels. They should look to negotiate with suppliers to reduce the rate they are paying for inventory. Pacific Grove should also see if they can extend the length of their accounts payable. Even if they have to pay a slight price premium, if the rate(APR) is less than what the banks are charging them in interest, it could help to both save money and reduce their capital needs. They should also see if they can adjust the credit policy terms with their customers to shorten the number of days before payment. By reducing receivables and increasing payables they should be able to reduce their financing needs from the bank in notes payable and thus lower their interest-bearing debt. It is unlikely that even with changes in working capital structure they will be able to reduce their debt within a year. Raising funds by selling common stock to pay-off...
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