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3|Page
Table of Contents
Question 1
...
6
Question 3
...
8
Question 5
...
What is the current operating position of California Pizza Kitchen? What decisions
does Susan Collyns face?
California Pizza Kitchen was established on 1985, by Larry Flax and Rick Rosenfeild, with the
concept of “designer pizza at off the rack prices”
...
Besides California Pizza Kitchen is a casual dining
restaurant chain that concentrates in innovative pizzas
...
A rapid growth occurred in this industry
...
Analysts have estimated up to 500 locations
for the development of retails of CPKs
...
CPK has a conservative financial policy; it shows a strong balance sheet with a strong staying
power, because it has not put any debt o the balance sheet
...
So this is an indicator to show CPK is performing really well against its competitors
...
10 in June making their P/E equal
to 31
...
So when compared to BJ’s Restaurants, CPKs biggest competitor
with a P/E of 48
...
With all the challenges facing by California Pizza Company as in increasing commodity prices,
higher labor costs, Softening demand due to high gas prices, Activist shareholders, in other
words uncertainty in the industry and general poor performance among competitors, despite all
CPK has showed a good operating performance
...
10,Earning per share is 0
...
5|Page
7/2/2007 Earnings Total
Share
Per
Price
Share
Debt
California
Kitchen
Pizza
Debt/
Capital
$
22
...
71
$
0
0
...
24
...
17
175
26
...
20
...
41
0
0
...
37
1
...
8%
Buffalo Wild Wings, Incorporated
41
...
93
0
0
...
24
...
02
0
0
...
F
...
37
1
...
2%
Red Robin Gourmet Burgers
40
...
82
114
31
...
16
...
01
68
50
...
Company’s most suitable capital structure and the
means of financing the expansion
...
10
...
Also for further expansion of their service restaurants there is
a cost around $85 million
...
2
...
6|Page
Actual
Debt/Total Capital
10%
20%
30%
6
...
5%
6
...
5%
6
...
5%
6
...
5%
30,054
30,054
30,054
30,054
Interest expense
Earnings before taxes
Income taxes
Net income
0
30,054
9,755
20,299
1,391
28,663
9,303
19,359
2,783
27,271
8,852
18,419
4,174
25,880
8,400
17,480
Book value:
Debt
Equity
Total capital
0
225,888
225,888
22,589
203,299
225,888
45,178
180,710
225,888
67,766
158,122
225,888
Return on equity
9
...
5%
10
...
1%
Interest rate
Tax rate
Earnings
interest
before
income
taxes
and
It is defined from the following table, given leverage levels lead to increasing the expected ROE
of CPK
3
...
beta
Cost of equity WACC
0%
0
...
5%
9
...
87
9
...
4%
20%
0
...
7%
9
...
92
9
...
2%
Total risk is shown by the WACC
...
7|Page
4
...
10
Shares repurchased (thousands)
0
Shares outstanding (thousands)
29,130
Earnings per share
0
...
7
Market value of shares/Shares outstanding =
$22
...
69
32
...
60
1,999
27,131
0
...
3
$22
...
67
34
...
10
10% leverage
628,516/ 28,119=22
...
60
30% leverage=
598,002/ 26,165=22
...
As the firm increases its leverage, it buys back
shares, as well as reduces its equity
...
The reason behind this is firm tends to buys back the shares using the cash from issuing debt
...
10, it will be costly to
investors
...
What role does the tax deductibility of interest play in encouraging debt financing at
California Pizza Kitchen?
8|Page
Firm is able to get tax benefits, when it uses debt as a financing method
...
In this company can achieve capital structure with almost with debt
...
So when CPK adds debt,it reduces
taxes
...
It is increased by the PV of the annual
interest tax shield
...
Due to government subsidies on interest,WACC is decreasing when debt equity
increasing