Case study of california pizza kitchen

California pizza kitchen optimal leverage

Across the board, sales fell and growth slowed. Collyns can use this leverage to finance their growth which based upon the projections seems like a viable option. CPK has managed to stay profitable and thrive. Hence the big question is what kind of capital structure policy the management should adopt which will be in sync with aim for achieving growth and expansion. How to cite this page Choose cite format:. Increase in EPS and RoE will increase the share price of the company and hence enhance shareholders wealth. As of June , they had retail locations in the US and abroad. The financial team also needs to decide on the appropriate capital structure. Facilities with similar energy requirements commensurate on climate, size, and hours of operation were grouped for easy comparison. 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 repurchase. Because the cost of debt is higher than the cost of equity, the breakeven EBIT is decreasing with each increased debt scenario.

How to cite this page Choose cite format:. If the company chooses to add debt to its capital structure, it will be able to repurchase 1.

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In absence of debt on CPKs balance sheet, the cost of capital is same as cost of equity which is 7. In the following report, our firm will propose some practices that will help to improve equity returns. Once equipped with the right data, they were able to translate what was once a big unknown into big savings. Well crafted execution of CPKs model has resulted in invaluable word of mouth publicity resulting in increase in organic traffic. Because we are above the EBIT breakeven point, the firm benefits from the increased leverage which raises the EPS as more debt is added. Under this structure, they should partake in a share repurchase program and buy back around 1. Another consideration is the growing commodity and labor costs, with anticipated minimum wage increases nationwide. CPK was successful in generating strong operating returns. Hence, book value of debt and equity has been considered for computing WACC. This is much higher than growth expected in overall restaurant industry in casual dining segment of full service sector which is estimated to grow at 5-Yr CAGR of 6. However, Collyns should be careful in deciding the capital structure with use of debt. How to cite this page Choose cite format:. The result is that a higher proportion of debt in the firm's capital structure leads to higher ROE as earnings are spread over a reduced amount of equity. Recommendations Above analysis shows how use of leverage has substantial potential to increase California Pizza Kitchens return on equity, value of overall firm and reduce overall cost of capital for the company. Due to its unique brand offerings, CPK has carved out a niche for patrons seeking a more upscale dining experience.

These increases also mean an increase in risk of the company because of the additional debt taken on. When taking into consideration the WACC equation, there will be an overall decrease in cost of equity to the firm because of the low cost of debt and the additional tax shield.

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However, Collyns should be careful in deciding the capital structure with use of debt. Cost of Capital CPK has an equity cost of capital of 5. Get Essay As per case, the market value has been shown the same as book value which is not comparable to market value of equity.

How does different debt levels change cpk s roe

However, Collyns should be careful in deciding the capital structure with use of debt. Why debt adds value to CPKs financial and share price Leverage is beneficial for companies as it provides interest paid on such debt is tax deductible and hence provide tax shield and as a result boost EPS. Cost of Capital CPK has an equity cost of capital of 5. Therefore, CPK will benefit by adding a tax shield to their capital structure which will increase their overall value. Despite uncertainty in the industry and general poor performance among competitors, CPK is performing marginally better than the overall industry. The situation requires a major decision by the CFO. Given the drop the Management Team was evaluating the option of rewarding its shareholders by repurchasing company shares from open market at todays price. The leverage from exhibit 9 has different effects for return on equity and cost of capital. Because less of the company is being financed with equity, earnings are spread out over less equity and therefore increase ROE. Market estimates the potential of number of CPKs full-service self- owned restaurant at
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Case Study: California Pizza Kitchen