California Pizza Kitchen Case

In order to explore whether or not California Pizza Kitchen should change their capital structure, we must first look at the brief history of the firm to get a better idea of the corporate culture and the firm’s appetite for risk. California Pizza Kitchen started in 1985 and they have been rather successful given that 95% of all restaurants fail in the first two years. They did not fail and even went public in 2000. In fact, as of the end of the second quarter of 2007, CPK has 213 locations in 28 states and 6 foreign countries (Shumadine).

The success of California Pizza Kitchen can be attributed to many factors. First, CPK diversifies its revenue streams. Instead of relying on the main business of operating company owned stores for revenue, they also receive revenues from royalties from franchised locations and royalties from Kraft for selling CPK frozen pizzas. Second, CPK’s core customers had an average household income of over $75,000. This allows CPK to weather downturns in the economy better than their competitors since their customers have more disposable income. Finally, CPK’s success overseas gives the company access to high growth overseas markets. Since they have already experienced success in the large Chinese market, CPK can merely expand its presence in China as a way to grow the company. These factors, along with others, have contributed to CPK’s stock price beating the S&P Small Cap 600 for restaurants, as shown in Exhibit A in the appendix.

As the CFO, you, Susan Collyns, can continue the success of California Pizza Kitchen by suggesting the company add debt to its balance sheet. The low interest rates because of the recession make our proposal the most attractive since CPK can issue debt at a low cost. Since the company currently has no debt, a modest increase in debt would not be very risky and it would increase the value of CPK due to decreased taxes. You can take this proposal one step further and use the added debt load to repurchase...