California Pizza Kitchen Solution

I. Problem Identification

A. Differentiation

California Pizza Kitchen is a unique business. Since opening they have expanded themselves into different markets, with many different locations. By the end of 2007 there were 213 locations that expanded into 6 foreign countries. Along with the expansion of locations California Pizza Kitchen also expanded through company owned locations, franchises and even a through a partnership with Kraft Foods. This partnership included the selling of California Pizza Kitchen branded frozen pizzas in grocery stores. At this time in 2007 the economy was facing some economical issues. Many restaurants had weaker sales while California Pizza Kitchen was showing an increase in revenue. Collyns has the opportunity to repurchase stock. If she chooses this she has to consider the companies goal of expansion.

II. Possible Solutions

A. Leveraging

Leveraging can affect the return on equity by decreasing the ROE percentage. This is not necessarily a bad thing, but it can cause investors to take a second look at the company before they invest. If you look at anticipated share prices for California Pizza Kitchen with different debt to capital percentages the share prices can vary. With a 10% debt to total capital there would be a share price of $21.74, while with a 40 debt to total capital there would be a $21.41 share price, Exhibit 1. If you base your solution on these share prices then the at 10% debt California

Exhibit 1

Debt to Capital Percentage Share Price

10% $21.74

20% $21.63

30% $21.52

40% $21.41

Pizza Kitchen could afford to purchase 137,523 shares, and at 40% debt they could purchase 558,677 shares, Exhibit 2.

III. Analysis of Solution

A. How it Affects Taxes

In order for California Pizza Kitchen to repurchase stock they have to spend money. If they spend all their money here then they would be unable to continue with the planned expansions in the upcoming year. However if California Pizza Kitchen does use...