Based on PGSC’s forecasted financial statements, are its profitable operations sufficient to quickly bring it into compliance with the bank’s requirements?
Pacific Grove being a profitable company had been re-investing all of its profits to be able to finance future growth within the company, but in the current situation the retain earning are not sufficient to be able to finance the continuously increasing sales. Pacific’s is in contact with a large regional bank who is willing to finance the operations of the company through the use of short-term notes payables which uses the account receivables of the company as leverage along with long term debt, which will be in the comfort of other assets of the firm along with the earning potential of the company.
With the loan amount received and the operation running smoothly the company was back on to its pattern of fast growth in sales, but with the 2008 crises, bankruptcy of many banks Pacific’s finance lenders being under pressure from the regulators after revised legislations were made to restrict their exposure. By the end of the last financial year Pacific held a total debt of $37million which stood as of 62% of its total assets and 216% of owners’ equity, along with 3.47 times equity multiplier ratio and interest cover ratio of 2.15 these were all alarming figures for the lenders considering the current economic situation.
The bank issued formal notices to reevaluate their action plan to be able to reduce their debt to equity ratio to 55%, equity multiplier to less than 2.7 times and if not done so the company will be denied further funding and with current economic conditions there were not many banks which were willing to finance any operation.
Pacific Grove Spice Company Harvard Case Solution & Analysis
Peterson the CEO along with the CFO Fletcher Hodges reevaluated the operations of the company forming a 4 year forecast, which they believe was reasonable beyond any doubt and the company will be able to achieve under the current action plan of the company.
Ratio Analysis on debt to equity, equity multiplier and interest cover upon the 4 year forecast showed very promising results for the company, with the debt to equity ratio showing a 10% decline rate in the forecasted years leading it to 55% in the year 2015, even though this is promising but the bank might not be satisfied with it as it still not reduced by 2012 under which the bank should be taken in confidence, the company would not take any loan till its ratio goes below 55%, the equity multiplier reduces by 16% in the forecasted years reaching 2.7 in the year 2015 again there will be a need to take the bank in confidence, whereas the interest cover reaches 2.6 times in 2015 increasing with a rate of 7.34%, if the company wants to take the bank in confidence this ratio should be reduced the company would need to work on it...............
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