Cpk Pizza Case

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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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Share price being determined by the Total Market Value of Equity divided by the current number of shares outstanding. As the firm increases its leverage, it buys back shares, as well as reduces its equity. The rate that equity decreases is smaller than that of shares being bought back, thus causing an increase in share price.

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.
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