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California Kitchen Case Study

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California Pizza Kitchen Case
California Pizza Kitchen has been operating since 1985 predominantly in California. As of June 2007, they had 213 retail locations in the US and abroad. Analysts have put estimates on the potential of 500 full service locations. CPK 's strategy includes the opening of 16 to 18 new locations this year including the closing of one location. In the second quarter of 2007, revenue increased 16% while comparable restaurant sales grew by 5%. Performing comparatively well against its competitors, CPK 's stock has been depressed recently falling to $22.10 in June making their P/E equal to 31.9 time current earnings. In comparison with BJ 's Restaurants with a P/E of 48.9, CPK appears undervalued. CPK 's direct
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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.
By leveraging their company, California Pizza Kitchen adds value to their Total Market Value of Capital. 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.
Breakeven levels of EBIT for each scenario No Leverage
10%
20%
30%
Debt
0
22589
45178
67766
Equity
225888
203299
180710
158122
Total Capital
225888
225888
225888
225888
Interest on Debt
0
1391
2783
4174

CSO
29130
28108
27086
26064
CSOU/CSOL
n/a
1.036
1.075
1.118
Breakeven EBIT n/a $40,166.67
$37,106.67
$35,373.00

10%

20%

EBIT/CSOU=(EBIT-i)/CSOL

EBIT/CSOU=(EBIT-i)/CSOL
EBIT=(CSOU/CSOL)(EBIT-i)

EBIT=(CSOU/CSOL)(EBIT-i)

EBIT=1.036(EBIT-i)

EBIT=(1.075)(EBIT-i)
EBIT=1.036(EBIT-1391)

EBIT=1.075(EBIT-2783)
-.036EBIT= -1446

-.075EBIT=-2783

$40,166.67

$37,106.67

30%

EBIT/CSOU=(EBIT-i)/CSOL

EBIT=(CSOU/CSOL)(EBIT-i)

EBIT=(1.118)(EBIT-i)

EBIT=1.118(EBIT-4174)

-.118=-4174

$35,373.00

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
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