Presented by:

DJ Douglas
Chasiti Dixon

Case #33
November 22, 2011

History

Defense Attorneys Larry Flax and

Rick Rosenfield created the first
California Pizza Kitchen in 1985 in
Beverly Hills, California
By 2007: 213 locations in 28 states
and 15 international franchises in
6 foreign countries
Three sources of income: sales at
company owned restaurants,
royalties from franchised
restaurants and royalties from a
partnership with Kraft foods to sell
CPK-branded frozen pizzas

http://www.youtube.com/watch?v=glF02oZ_QB8

The Power of Susan

Collyns
Facilitating

success:

Increase advertising
Increase leverage using debt financing
Purchase U.S. Treasury Securities
Change Capital Structure Policy
Repurchase stock option

Effect of Leverage on
ROE

Interest Rate
Tax Rate
Earnings before income taxes and
interest
Interest Expense
Earnings before taxes
Income taxes
Net income

Book value:
Debt
Equity
Total capital

ROE = Net Income/ Shareholder

Equity

Debt/Total Capital
Actual
10%
20%
30%
6.16% 6.16% 6.16% 6.16%
32.50
32.50 32.50
32.50%
%
%
%
30,054 30,054
0 1,391
30,054 28,663
9,755 9,303
20,299 19,359

0 22,589
225,88 203,29
8
9
225,88 225,88
8
8

30,054
2,783
27,271
8,852
18,419

45,178
180,71
0
225,88
8

10.19
8.99% 9.52%
%

30,054
4,174
25,880
8,400
17,480

67,766
158,12
2
225,88
8

11.05
%

Effect of Leverage on Cost of

Capital
CAPM

= bL = bU[1 + (1 T)D/E]

10%
bL = bU [ 1 + ( 1 - 32.5%) 22,589 /
628,516]
bL = 0.85 [ 1 + (0.675) 0.0359]
bL = 0.85 [ 1 + 0.0242]
bL = 0.85 [1.0242]
bL= 0.87057

20%
bL = bU [ 1 + ( 1 - 32.5%) 45,178 /
613,259]
bL = 0.85 [ 1 + (.675) 0.0737]
bL = 0.85 [ 1 +0.0497]
bL = 0.85 [1.0497]
bL= 0.892245

30%
bL = bU [ 1 + ( 1 - 32.5%) 67,766 / 598,002]
bL = 0.85 [ 1 + (0.675) 0.1133]
bL = 0.85 [ 1 + 0.0765]
bL = 0.85 [1.0765]
bL= 0.915025

WACC
Formula:

(kd) (1-t)(%debt-financed)

kd=6.16%

tax shield: 32.5%

ke= capm beta UL

debt financed divided by Total market value

(ke)(%equity-financed)

equity financed divided by total market value

WACC:

kd

10%

20%

30%

6.16%

6.16%

6.16%

tax shield

0.6750

0.6750

0.6750

debt financed

0.0347

0.0686

0.1018

ke

0.095529

0.096612

0.0977513

equity financed

0.9653

0.9314

0.8982

ovr kd

0.001443

0.002852

0.0042328

ovr ke

0.092214

0.089985

0.0878002

WACC

0.093656 0.092837

0.092033

9.20%

9.37%

9.28%

Re = Rf + B[Rm - Rf]
0.095529 RE

CPK Share Price

Book value:
Debt
Equity
Total capital

Market value:
Debt
Equity
Total capital

Number of Shares Outstanding

MV Stock Price per Share

BK Stock Price per Share
Difference btwn BK & MV

Actual

0
225,888
225,888

0
643,773
643,773

29,130,000
$
22.10

$
7.75

$
14.35

Debt/Total Capital
10%
20%

22,589
203,299
225,888

22,589
628,516
651,105

29,130,000
$
21.58

$
$

30%

45,178
67,766
180,710
158,122
225,888
225,888

45,178
67,766
613,259
598,002
658,437
665,768

29,130,000 29,130,000
$
$
21.05
20.53
$
$
6.98 6.20
5.43
$
$
14.60 14.85
15.10

Stock Price &Total Capital

Structure

Treasury stockRepurchases
Number of Shares Oustanding- Actual
Stock Price per Share
EPS
ROE
Number of Shares Outstanding Less Repurchase1M X $22.10= $22,100,000

29,130,000
$
22.10

$
0.70

8.99%

EPS

28,130,000
$
22.89

$
0.72

ROE

9.25%

Stock Price per Share

Number of Shares Outstanding Less Repurchase

to recover 10% decline= 2.65M * $22.10=
$58,565,000
Stock Price per Share
EPS
ROE
Number of Shares Outstanding to Meet Industry
Standards- 9.13 M X $22.10 = $201,773,000
Stock Price per Share
EPS
ROE

29,130,000 29,130,000
$
$
21.58
21.05

$
$
0.66
0.63

9.52%
10.19%

28,130,000
$
$
0.69

22.34

28,130,000

$
$
0.65

9.84%

29,130,000
$
20.53
$
0.60
11.05%

28,130,000

21.80 $
$
0.62
10.57%

21.26

11.53%

26,480,000
$
24.31

$
0.77

9.83%

26,480,000 26,480,000 26,480,000

$
$
23.74
23.16
$
22.58
$
$
$
0.73
0.70
0.66
10.52%
11.41%
12.60%

20,000,000
32.18865
$
1.01

13.01%

20,000,000 20,000,000 20,000,000

31.4258
30.66295
29.9001
$
$
$
0.97
0.92
0.87
14.51%
16.62%
19.81%

CPK No Longer Publically

Traded
Shares in California Pizza Kitchen first traded on the
NASDAQ National Market on August 2, 2000 under the
ticker symbol CPKI. On July 7, 2011, CPK and Golden Gate
Capital announced the successful completion of the
acquisition of CPK by an affiliate of GGC. As a result of the
acquisition, our common stock is no longer publicly
traded.

http://www.cpk.com/faqs/

Interest Tax Deductions

Before Stock Repurchase

Market Price

$22.10

Investor's # of
Shares

$22.10

# of Shares
Outstanding

1,000

After Stock Repurchase

Market Price

Investor's # of
Shares

1,000

29,130,000

# of Shares
Outstanding

28,130,000

EPS

0.70

EPS

0.72

Increased

wealth
to
shareholders

due to stock
repurchase

without
double
taxation.

Recommended Capital
Structure Policy
Repurchase 2.65 million shares of stock
at a cost of $58,565,000
using the 30% debt financing option totaling
$67.7 million
EPS decrease = $.04
ROE increase= 3.61%
Cost of Capital increase= 0.91

Questions?