3) Should Pacific Grove Spice acquire High Country Seasonings? To answer the question, note that the potential acquisition of High Country Seasonings is both an investment opportunity and a financing.

Recommended approach for evaluating the investment opportunity:

(a) Forecast High Country's Income Statement and Balance Sheet for 2012-2015.

(b) Determine High Country's free cash flow to investors.

(c) Is High Country's value greater than what Pacific must pay to acquire the firm?

(d) From an investment standpoint, should Pacific acquire High Country?

(e) Special note: Show how you calculated the free cash flow and the NPV. Do not merely insert values without showing the calculations

4) Now evaluate the potential acquisition from a financing standpoint. What are the advantages/disadvantages for Pacific Grove Spice of acquiring High Country Seasonings in terms of meeting its financing needs?

Recommended approach for evaluating the financing opportunity:

(a) Prepare financial statements for the combined Pacific/High Country entity.

(b) Prepare forecasted financial statements for 2012-15 for the combined entity. Use the assumptions given in the case for interest expense, goodwill, and the liabilities and owner's equity accounts.

(c) From a financing standpoint, should Pacific acquire High Country?

5) What is your final recommended course of action for Pacific Grove Spice regarding the television program project, the equity issue of 400,000 shares of stock, and the potential acquisition of High Country Seasonings? Provide support for your answer.

Since you cannot compute depreciation directly, this is what you can do to compute FCF. In the FCF formula, replace the term "Depreciation -CapEx" with the negative of the change in PPE (i.e., with "PPE(beg year) - PPE(end year)"). This works, since PPE(end year) - PPE(beg year) =CapEx- Depreciation.

When constructing the balance sheet of the combined firm, you should simply sum up all assets and liabilities items of Pacific and High Country. However, for equities' accounts, what you should do is leave Pacific's Retained Earnings unchanged (i.e., just use Pacific's retained earnings as retained earnings of the combined firm) and then add the market value of newly-issued equity (used to finance the purchase of High Country) to Common Stock of Pacific. You will then balance the balance sheet through the Goodwill account on the asset side (i.e., Goodwill equal whatever amount makes the balance sheet balance).

please note:

ou will have to estimate the terminal growth rate for High Country Seasonings on your own (it is not given in the case). Please explain how you came up with your number. As long as you use something realistic and conservative, you will be OK.

When computing Net Working Capital, do not include Bank Notes Payable in the calculation.