1

Student Name

Subject

Professor

Institution

Date
 2

California Pizza Kitchen Case

California Pizza Kitchen Case was started in 1985 in California. The company had 213

retail locations in 23 countries and six foreign countries. The company is planning to open

between 16 and 18 new locations in the year 2007. The company expected to record an increase

of 16% on profit and a 55 increase in sales. The company performs better than its competitors,

although its stock dropped to $22.10 in June (Rosenfield, 2020). The price to earnings ratio was

determined to be 31.9 times the current earnings, as indicated in the excel. CPK appears to be

undervalued when compared to BJs restaurant with P/E of $48.9. The key primary issue in the

case is how to "finance expansion and the firm's most appropriate capital structure." The capital

structure of the company is changed through stock repurchases. The repurchase decision will

increase by EBIT, ROE, EPS, stock prices, and cost of capital. The cost of expanding retail

locations is budgeted at $85 million.

The management decisions to use debt in the stock repurchase helps in moderately

levering up the company. The tax shield will increase the company's earnings per share (EPS).

The impact of tax shield reduces the cost of debt financing over equity financing. The reason for

this is that the interest tax shield reduces taxable income and subsequently causes an increase in

the earnings per share (EPS) (Rosenfield, 2020). Similarly, the return on equity (ROE) will

increase because earnings will be spread over a large amount of equity.

Cost of Capital

ℜ=Rf + β(Rm−Rf )

Rf =5.2(30 years rate)

Rm=5 % ; ℜ=5.03 % ¿
 3

WACC

WACC=WeRe+Wdrd

10% Debt scenario

5.14 %=0.9 ( 0.0503 )+ 0.1(0.0616)

30% Debt scenario

5.37 %=0.7 ( 0.0503 )+¿ 0.3 ( 0.0616 )

Return on Equity

Equity
S h are Price=
S h aresOutstanding

PMT
PV =
r

NPV =D+ PV

V l ¿ V U + T∗D

0% Debt

Share Price = E/CSO

=643773000/29130000

Share price= $22.10

 4

Reference

Rosenfield, R. (2020). California Pizza Kitchen Case. Case Study. Retrieved 8 August 2020, from

http://file:///C:/Users/user/Downloads/Case%2032%20(2)%20(1).pdf.