Virginia May Chocolate Company
Virginia May Chocolate Company is one of the largest producers of chocolate goods and most if its products are packaged for grocery chains under store or generic labels. Currently Virginia May needs to raise $60 million to finance a major plant expansion which the organization has already committed to as the contracts have been signed. The problem however is that the company’s financial position is deteriorating due high ingredient costs and the firm’s use of debt financing has been steadily rising in the face of declined earnings. These problems have lead to the firms bonds being downgraded from A to BBB, the company’s interest coverage ratio to fall to a dangerously low2.7x, the company stock to sell at roughly only 70% of the book value and has reduced its flexibility in obtaining external capital. In order to raise the $60 million needed to finance the plant expansion the company can not issue first-mortgage bonds for the debt financing component and meet its equity requirements for the expansion by retaining earnings because a new long-term debt issue would cause the firm’s credit rating to be downgraded even lower than it has already fallen which would lower its bonds to the junk category.