Should PGSC issue new equity of the external investment group? Explain your reasoning.
Since the Pacific is already listed on the NASDAQ issuing further equity is a viable option for the company this will not only bring in finance for the company to use to operate in high growth, but would also reduce the company’s gearing, currently the share is trading at a rate of $32.60 having the market value of equity of $38 million.
Although Pacific holds a recommendable position among other giants in NASDAQ but due to the 2008 crises the investors’ confidence has been shattered, making it very difficult and expensive to issue shares on the NASDAQ for the moment, the increased volatility due to the immediate reaction to every news floating in the market has made issuance of shares not a viable option anymore.
William Rodriguez an old known associate of Peterson, who brought an offer from a group to purchase 400,000 shares at an effective price of $27.50 which is a very disappointing rate considering the fact currently the shares are traded at $32.6 on the market, this just showed private investors were to not interest in investing and if they did it was on a reduced price which would not be acceptable to the company, making the issuance of shares not a viable option.
Should PGSC acquire High Country Seasonings? Explain your reasoning.
Pacific should acquire High country seasonings on the basis of financial evaluation conducted on the company that shows the Net present value of the company on the basis of its future operation along with its terminal value and the internal rate of return for the company in the Pacific.
For the determination of the cost of equity of High Country beta equity of competitor companies was taken which was un-geared, the average of the un-geared beta of competitor companies was considered to be a beta asset of the industry, which was then re-geared with debt of High Country to give the company’s beta equity, using the beta equity along with risk free rate that was of US treasury bond and the market risk premium as given to derive the cost of equity 5.3%.
Using the cost of equity, 5.3%, assuming the cost of debt to be 3.25% along with a tax rate of 27%, the cost of capital of the company was calculated to be 5.05%.
The forecasts of the company were made with the parameters provided in the case along with parameters provided for the calculation of the working capital, against which forecast of year 2012, 2013, 2014 and 2015 was created, assuming the growth rate to be 3% terminal value for the company was also calculated, discounting all the free cash flows at discount rate of 5.05% an NPV of $25million is achieved along with an IRR of 51% making this a highly recommendable investment.
The other most important factor for this acquisition is due to the fact the High country has very little long term debt, consolidation with Pacific will substantially reduce the overall gearing ratio making debt financing available for the company................................
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