California Pizza Kitchen Case Study on Capital Structure/Leveraging Debt

1936 Words8 Pages
A company's capital structure is a very important component of a company's financial health and longevity. The capital structure should maximize total net profit and overall shareholder wealth. An optimal proportion of equity and debt as a company's capital structure is an indication of a well-managed and successful company and should be a goal for most corporations. Beverly Flax and Rick Rosenfield founded California Pizza Kitchen (CPK) in 1985 in Beverly Hills, California. It is a casual dining, full service restaurant concept that specializes in gourmet pizzas with unique topping combinations. They operated 213 locations in 28 states and 6 foreign countries by the end of the second quarter of 2007. Almost all of the firms revenue…show more content…
Figure 1. California Pizza Kitchen Valuation Analysis (Millions of Dollars Except Per Share Data) Input Data (Millions Except Per Share Data) Tax rate 32.50% Debt (D) $0.00 Number of shares (n) 29.13 Stock price per share (P) $22.10 NOPAT $30.05 Free Cash Flow (FCF) $27.59 Growth rate in FCF 5.00% Capital Structure (Millions Except Per Share Data) Market value of equity (S = P ´ n) $643.77 Total value (V = D + S) $643.77 Percent financed with debt (wd = D/V) 0% Percent financed with stock (ws = S/V) 100% Cost of Capital Cost of debt (rd) 6.16% Beta (b) 1.50 Risk-free rate (rRF) 2.00% Market risk premium (RPM) 5.00% Cost of equity (rs = rRF + b ´ RPM ) 9.50% WACC 9.50% Intrinsic Valuation (Millions Except Per Share Data) Value of operations: Vop = [FCF(1+g)]/(WACC−g) $643.77 + Value of ST investment $0.00 Total intrinsic value of firm $643.77 − Debt $0.00 Intrinsic value of equity $643.77 ÷ Number of shares 29.13 Intrinsic price per share $22.10 Figure 2. Estimating California Pizza Kitchen’s Optimal Capital Structure (Millions of Dollars) Percent of Firm Financed with Debt (wd) 0% 10% 20% 30% 40% 50% 1. ws 100.00% 90.00% 80.00%

More about California Pizza Kitchen Case Study on Capital Structure/Leveraging Debt

Open Document