Case Overview Of The California Pizza Kitchen

Assumptions need to be made for the Cost of Equity. We used the corporate rate of 11.766%

Given that the cost of equity is 9.4% and the cost of debt is 12.2%, Star’s cost of capital can be calculated as 9.14% (Appendix B). The company was also considering raising the cost of debt to the industry average of 19%. At this cost of debt, Star Company would have a lower cost of capital of 8.24% (Appendix B) because interest on debt capital is deductible whereas dividend payments on equity capital are not.

How will a buyback of shares provide a “quick fix” for EPS (earning per share)?

The number of stores is much more than California Pizza Kitchen, Inc. which has 266 stores in

What would college students eat without pizza? Pizza is often thought of as a Italian food ,which it is, but,it has more of a history than most Americans think, throughout the past 300 years; pizza is considered a staple in many Americans diets, and it may be in trouble.

When analyzing which debt financing option CPK should choose, the weight average cost of capital (WACC) will provide an approximation on how much CPK must earn in order to satisfy the amount financed. The values of WACC for the actual, 10%, 20%, and 30% options can be found in Appendix A. It appears that the higher the financial leverage, the lower the WACC will be. Take for instance if CPK chooses a 30% debt to capital situation, the ROE will be 11.1 % with a 9.2% WACC. In contrast, at the actual value, the ROE is 9% with the WACC being 9.5% and could pose badly for CPK. As long as CPK is comfortable with the high risk of a 30% debt to capital ratio, then it would be the most beneficial in terms of adding economic value to the company, and for the shareholders, while providing a high financial leverage.

Before pizza became well known, it was only eaten by poor people as a way to use up ingredients that would otherwise get thrown away. Pizza was an inexpensive food, and it could be eaten quickly. It was also sold on street sides, which made it very easy to purchase.

Market value proportions of: Debt = $1,147,200 / $4,897,200 = 23.4% Pref. Share = $1,250,000 / $4,897,200 = 25.5% Common equity = $2,500,000 / $4,897,200 = 51.1%

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.

Since there are significant changes in the company for the last 3 years such as descending trend in car and truck market in 1991, sale of one of their core electronics business, terminated Volvo agreement etc.; the company thinks that their financial value (equity and debt ratios and weights) and accordingly cost of capital is changed. Also company has free cash (derived from the sales of electronics

EPS, DPS and ROE increase when the company uses debt as the number of shares decrease and earnings available to shareholders and bondholders increases due to tax shield. Assuming constant P/E ratio, stock price also increase compared with no debt. Assuming constant dividend yield, stock price also increase when the company use debt. EPS and DPS are maximized when the company maintains debt-to-capital at 40%.

* For the pasta we can see (exhibit 6) that 26% of total surveyed persons perceive it as a fresh product, only 8% think its price is too high, and 61% found nothing dislikable in it.

Perfect pizzeria is staffed primarily from college and high school students; however, when hiring for management positions there is no systematic criteria in which to select the best-qualified person for the job. Those currently occupying leadership positions do so without the proper leadership training or experience to handle the open communication required to build team cohesion in a food franchise environment.

Weight of Equity = 71%; Equity Cost of Capital = 12%; Weight of Debt = 29%; Debt Cost of Capital = 4.55%

Stock options are granted to employees as a form of compensation or incentives. Both public and private companies follow this practice. The options give the executives the right but not the obligation to buy the company’s shares at a fixed price before the expiration date is reached. If the company does well, its shares prices rise. But the employee can buy the shares at a lower price fixed at the beginning. This will give the employee instant profit. Knowing that he/she will make a profit when the company’s share prices go up, the employee is motivated to work hard for the company to grow. This is why employee stock options is such a popular method of compensation among many companies. However according to Hall, critics state that the stock options only motivate the employee to work harder for the immediate boost of the company’s sales so as to increase their own profits and that the employee has no real interest in the actual long term benefit of the company. It ends up in a win-win situation between the company and its employees. He cannot sell the options, he cannot pledge them as a collateral for a loan. Stock options is a contract that the employee / executive has with the company whereby he/she has the right to buy a specific amount of stock within a specific period of time. Generally the maximum period is 10 years. The employee has to be in good standing with the company and has to perform well. The options are vested in him and he has the right to