Case 33- California Pizza Kitchen

Case 33- California Pizza Kitchen

Case Study

Susan Collyns could facilitate the success of CPK plenty of different ways. She could spend more money on marketing the overall business and the CPK frozen pizza brand. For example, they could spend 3% to 4% of sales on advertising just like their competitors such as: Chili’s, Red Lobster, Olive Garden and Outback Steakhouse do a year. They could continue to create new menus with high quality ingredients which can leave a mark to customers’ tastes. Customers will find themselves coming back each time new items come out. She could maintain the ASAP restaurants where brand extensions of the company are being disposed. The ASAP restaurants in airport locations contributed to the revenue and to the success of CPK. More importantly, Susan Collyns could increase the company’s ROE by letting its assets exceed its equity base in the Balance Sheet. Furthermore, the company could use leveraging by borrowing to acquire more assets. This would help to increase ROE. A major benefit with leveraging would be that it would reduce the corporate income tax liability of CPK, which was almost $10 million in 2006. Her two primary issues are how to finance expansion and the firm’s most appropriate capital structure. The focus of this analysis will be on the change in capital structure through the repurchase of shares at today’s market price of $22.10. The effect of the repurchase will be analyzed from an EBIT breakeven, ROE, EPS, Cost of Capital, and stock price perspective. It should be noted that there is an $85 million cost to fund further expansion of their full service restaurants. This is a known expense that will have to be financed by issuing equity or leveraging the company by taking on debt.

When figuring out what role leverage plays in affecting the ROE, I first found Bu. Once I calculated that, I could see what role it plays. If percentage change of EBIT is more than the percentage change in sales, the operating...