California Kitchen Case albaturons.ga | Cost Of Capital | Capital Structure

 

california pizza kitchen case study

Summery of California Pizza Kitchen case - Free download as Word Doc .doc /.docx), PDF File .pdf), Text File .txt) or read online for free. Scribd is the world's largest social reading and publishing site.5/5(2). Jul 18,  · California Pizza Kitchen - case essay Words | 9 Pages. Executive Summary California Pizza Kitchen (CPK) was founded in by Larry Flax and Rick Rosenfield with a vision of offering customers designer pizza at reasonable prices. California Pizza Kitchen was first created in in Beverly Hills, California. By there were locations throughout 28 states and 6 countries. Although 41% of the stores were based in California, keeping with the restaurants theme, the dining model flourished throughout the United States.


California Pizza Kitchen Case Study Essay Example


California Pizza Kitchen has been operating since predominantly in California. As of Junethey had retail locations in the US and abroad. Analysts have put estimates on the potential of full service locations. CPK's strategy includes the opening of 16 to 18 new locations this year including the closing of one location. CPK's direct competitor, BJ's pays no dividend and has a similar beta and therefore it makes for a good comparative company.

Despite uncertainty in the industry and general poor performance among competitors, CPK is performing marginally better than the overall industry. Susan Collyns has several decisions that need to be made. Her two primary issues are how to finance expansion and the firms most appropriate capital structure. This is a known expense that will have to be financed by issuing equity or leveraging the company by taking on debt.

How does debt add value to CPK? By moderately levering up and repurchasing shares, companies can normally increase their EPS because of the interest tax shield.

This typically makes the cost of issuing debt cheaper, than that of issuing equity, california pizza kitchen case study. The interest tax shield will reduce california pizza kitchen case study income so that when debt is used to repurchase shares outstanding, there will be a subsequent increase in EPS. A similar effect happens with ROE. Because less of the company is being financed with equity, earnings are spread out over less equity and therefore increase ROE.

Cost of Capital CPK has an equity cost of capital of 5. Based on this finding, it is not sensible for CPK to take on debt. If their cost of capital increases, it will affect every project they take on by lowering their returns on every capital project. This can be seen in the graph below. Because the cost of debt is higher than the firms unlevered cost of capital and their cost of equity, adding debt to the business does not add value to California Pizza from a cost of capital perspective, california pizza kitchen case study.

Return on Equity The Return on Equity is rising as the firm takes on more debt, becoming more leveraged. This is true as interest payments to creditors are tax deductible and therefore the company is able to generate a higher return on fewer shares outstanding because of. The result is that a higher proportion of debt in the firm's capital structure california pizza kitchen case study to higher ROE as earnings are spread over a reduced amount of equity.

Share price being determined by the Total Market Value of Equity divided by the current number of shares outstanding. As the firm increases its leverage, it buys back shares, as well as reduces its. The rate that equity decreases is smaller than that of shares being bought back, thus causing an increase in share price. Shares Outstanding Shares outstanding decrease as the firm takes on more debt.

The reason being is that the firm buys back shares with the newly acquired cash from issuing debt, california pizza kitchen case study. They also increase their share price. It should be considered that as they increase their debt to equity ratio, they also increase their risk of default. The results from the breakeven EBIT analysis are calculated to current market conditions.

The market has equities; in particular, California Pizza priced its prices at very high valuations. It will be especially expensive to investors to buy back shares if California Pizza using debt because their cost of debt is higher than their cost of equity. California Pizza has decreasing break even EBITs because the numerator interest expense is expanding with each scenario of debt financed stock repurchases. Because the cost of debt is higher than the cost of equity, the breakeven EBIT is decreasing with each increased debt scenario.

As the company changes their capital structure to incorporate varying levels of debt, they are reducing their common shares outstanding california pizza kitchen case study equity within the company, california pizza kitchen case study. In all three cases, ROE continues to rise as more debt is added in. Because we are above the EBIT breakeven point, the firm benefits from the increased leverage which raises the EPS as more debt is added. In conclusion, it is the analysts recommendation that California Pizza Kitchen change its capital structure by issuing debt and repurchasing shares.

This instates a tax shield, which reduces taxable income, increases the value of the company, and in turn increases the return to shareholders. Subsequently allowing earnings to be spread out over fewer shares and as the california pizza kitchen case study increases, shareholders will have greater ROE and EPS. Read Free For 30 Days. California Kitchen Case Study.

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California Pizza Kitchen Case Study on Capital | Bartleby

 

california pizza kitchen case study

 

California Pizza Kitchen was first created in in Beverly Hills, California. By there were locations throughout 28 states and 6 countries. Although 41% of the stores were based in California, keeping with the restaurants theme, the dining model flourished throughout the United States. California Pizza Kitchen Case. California Pizza Kitchen has been operating since predominantly in California. As of June , they had retail locations in the US and abroad. Analysts have put estimates on the potential of full service locations. Summery of California Pizza Kitchen case - Free download as Word Doc .doc /.docx), PDF File .pdf), Text File .txt) or read online for free. Scribd is the world's largest social reading and publishing site.5/5(2).