pacific grove case study

Topics: Stock, Stock market, Cash flow Pages: 8 (1687 words) Published: September 11, 2014
Wong Tze Siang. 22972668.

EXECUTIVE SUMMARY

By 2015, Pacific Grove (hereafter referred as "PG") will reach a 55% ratio of interest/bearing debt to total assets and their equity multiplier will be 2.77 which is consistent with Peterson's expectation. I must be noted that over the next 4 years, PG's interest coverage is forecasted to increase suggesting that they will gradually be building up more earnings to cover its debt payment which is a good sign for the banks.

Dilution of shares seems have to have little impact on the EPS of PG shares. Therefore, it is expected that PG shareholders would accept the issuing of shares. However, this information has to be clearly communicated by PG's management to its shareholders in order to gain support of this share issuance.

It is also fairly safe to say that it is a good decision for PG to enter into the television deal. It is noted that the project would yield a positive NPV at 10%, 15% and 20% discount rates. The project also requires only a modest initial investment

The loss of confidence in credit by the overall market had left PG with no choice but to obey the demands of their bank as it would be difficult to obtain credit from other institutions during the time. In addition to that PG was also in the midst of a bearish stock market. This is justified by the fact that investors were anxious about the market and only willing to offer $27.50.

A number of recommendations are given to help PG reduce their debt levels. These include improving their supply chain efficiency and forecasting so that they can reduce their inventory levels, negotiating with suppliers to reduce the rate they are paying for inventory and can extending the length of their accounts payable.

Overall, it is recommend that PG accepts the investment group's offer of $27.50 and issue 400,000 common stock to raise $11M for reasons mentioned earlier in the report. The extra funds will give PG more capacity to fund the television program in addition to reducing its debt to meet their bank's requirement, as well as purchasing an underpriced High Country.

1.0 DEBT

According to the forecast in Exhibit 1, PG seems to be on course in meeting their bank's demand of 55% Debt to Total Asset ratio and 2.7 equity multiplier. Table 1 in the appendix illustrates a number of ratios relating to PG's debt. 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 which is consistent with Peterson's expectation. Although PG's current future is projected to meet the bank's demands, the issue that is yet to be known is whether the banks are willing to allow PG 4 years to achieve this. If the banks are reluctant to grant PG such a lengthy time period, PG will need to make smart changes in reducing these ratios. Recommendations for PG in to solve this problem are discussed later in the report. An another note, it must be noted that over the next 4 years, PG's interest coverage is forecasted to increase suggesting that they will gradually be building up more earnings to cover its debt payment which is a good sign for the banks. This positive factor might help influence the bank to give PG the entire 4 years to meet their requirements.

2.0 SELLING NEW COMMON STOCK

The issue with selling new common stock is that it can create dilution amongst existing shareholders. Shareholder dilution will lower share price in addition to sending a negative signal to the company's shareholders. PG's common shares outstanding would increase from 1,165,327 by 400,000 to 1,565,327. PG's current EPS in 2011 is 2.037. According to the earning figures from the forecast in Exhibit 1, the EPS will be 2.136 after issuing the new shares at year 2012. Table 2 (attached in the...
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