The Interaction between Investment and Financing Decisions



The Interaction between Investment and Financing Decisions

Introduction

The paper attempts to analyze various options available to Pacific Grove Spice Company for the purpose of fulfilling the bank requirements as well as securing its profitable future. The paper first analyses the credibility of Pacific Grove Spice Company's financial statements in relation to the compliance with bank requirements, then proceeds on to analysing the three available options.

Discussion

Pacific Grove Spice Company's Financial Statements Analysis as per Compliance with the Bank's Requirements

Pacific Grove Spice Company needs to raise funds for the purpose of expanding its business operation but it is left with the option of raising funds by way of debt financing only. Raising funds is an important aspect of financial planning (Ryan & Con O'Brien, 1990, pp 92 - 99). The notable point here is that the bank has put forward a condition for Pacific Grove Spice Company, which it has to fulfil in order to expect any further loans or debts being granted. The bank expects Pacific Grove Spice Company to reduce its interest bearing debts to total asset ratio to 55% and to reduce the equity multiplier to 2.7 times or less. Unless Pacific Grove Spice Company reduces these two ratios to the mentioned limits, Pacific Grove Spice Company shall not be granted any further debts by the bank.

Pacific Grove Spice Company is a business that is operating considerably well and has grown in terms of profit and assets over the past few years. The total asset of Pacific Grove Spice Company increased from $36.722 million in 2007 to as high as $59.620 million in the year 2011. Apart from that, the net profit of the company rose from $46.180 million in 2007 to $80.940 million in 2011. This signifies that Pacific Grove Spice Company has not only been operating profitably, but also it has been expanding its business over the past few years. Moreover, the forecasted financials that have been prepared with precision also point towards the fact that Pacific Grove Spice Company continues to grow in terms of profit as well as total capital employed. However, the bank still expects Pacific Grove Spice Company to reduce its interest bearing debt to total asset ration as well as the equity multiplier to particular limits. This is because the current conditions of the market are not as good as they were in the year 2007 when the bank had given the debts. The financial crisis of 2008 have adversely affected the financial institutions and increased the risks, which has caused banks to be much more cautious about their operations (Brigham, 2010, pp. 113). This is the prime reason for the limiting of the two ratios that the bank expects Pacific Grove Spice Company to reduce to the mentioned limits. Pacific Grove Spice Company shall easily achieve the expected limits set out by the bank, as denoted by the forecasted financial action plan.

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