California pizza kitchen capital structure leverage
Cost of Capital CPK has an equity cost of capital of 5. This is a major increase considered there has been sharp decline in industry profits due to increases in labor cost, high gas prices, decreased household wealth, and increased food prices.
The recent decline in share raised a question within Management Team of whether this was an ideal time to launch large share repurchase program financed through debt.
Because we are above the EBIT breakeven point, the firm benefits from the increased leverage which raises the EPS as more debt is added.
California pizza kitchen case study excel
Led by Chief Financial Officer Susan Collyns, the financial team of CPK was reviewing the preliminary results for the second quarter to determine if the stock repurchase program would provide a significant financial leverage for the company. Subsequently allowing earnings to be spread out over fewer shares and as the market increases, shareholders will have greater ROE and EPS. However, Collyns was aware of the fact that use of borrowing or leverage will boost return on equity RoE of the company. Financial Leverage and ROE The primary goal of CPK in was to increase its financial leverage utilizing the stock buyback program while ensuring the company will have enough funding for future growth. Hence, Susan Collyns has a strong case to present to its Management Team including co-CEO Rick Rosenfield and get their buy in on the decision of using debt financing to reward its shareholders in the event of falling share price by launching a share repurchase program. Analysts have put estimates on the potential of full service locations. The company is currently debt free and has limited cash on its balance sheet. Words: , Paragraphs: 32, Pages: 9 Publication date: October 17, Sorry, but copying text is forbidden on this website! The management is also upbeat on the success and prospects with franchising full service restaurants internationally. California Pizza Kitchen has been growing consistently and ahead of competition by a large margin. Based upon information provided in the case, it appears that CPK has an abundance of strengths, with minimal weaknesses, that are currently affecting the company. This is a known expense that will have to be financed by issuing equity or leveraging the company by taking on debt. The restaurant chain derived its revenue from three sources: sales at company-owned restaurants, royalties from franchisee restaurants, and royalties from a partnership with Kraft Foods to sell CPK branded frozen pizzas in grocery stores. Since going public in , CPKs management had avoided putting any debt on the balance sheet. As the firm increases its leverage, it buys back shares, as well as reduces its equity.
This typically makes the cost of issuing debt cheaper, than that of issuing equity. California Pizza has decreasing break even EBITs because the numerator interest expense is expanding with each scenario of debt financed stock repurchases.
How does different debt levels change cpk s roe
Although co-CEO Rick Rosenfield is of the opinion of not using leverage on its balance sheet so to have a staying power in time of crises and industry downturn, the CFO Susan Collyns is of the opinion how use of leverage can provide benefits to company. Demographics, in addition to endorsement of the chain, were another major reason for consumer attraction towards the brand. The rate that equity decreases is smaller than that of shares being bought back, thus causing an increase in share price. For Susan Collyns and the financial team at CPK, utilizing the aforementioned capital structure policy will not only provide a substantial amount of financial leverage for CPK, but it will also increase the economic value of CPK for both the owners and investors. Led by Chief Financial Officer Susan Collyns, the financial team of CPK was reviewing the preliminary results for the second quarter to determine if the stock repurchase program would provide a significant financial leverage for the company. Current projections show that CPK has room to grow and expand. Keeping in mind that this illustration deals with impacts from the weaknesses or threats that CPK currently faces, these are important factors that should be considered if there were an economic decline or significant loss of operating income. The market has equities; in particular, California Pizza priced its prices at very high valuations. Hence, this also proves the fact why leverage boosts firms value.
Increase in EPS and RoE will increase the share price of the company and hence enhance shareholders wealth. As per case, the market value has been shown the same as book value which is not comparable to market value of equity. By multiplying the EBIT by a factor of 2, it will illustrate the projected expansion of the company along with the influence of increased income with the stock buyback program.
As of Junethey had retail locations in the US and abroad. As the firm increases its leverage, it buys back shares, as well as reduces its equity.
Susan Collyns wants to grow the business, balance shareholder value, and keep risk to a minimum.
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