Case 33: California Pizza Kitchen

California Pizza Kitchen (CPK) was co-founded in 1985 in Beverly Hills, California by Rick Rosenfield and Larry Flax. Rosenfield and Flax both hold the title of Co-President, Co-CEO, and Co-Chairman of the Board of Directors for California Pizza Kitchen. Susan Collyns, Chief Financial Officer, currently leads the financial team at California Pizza Kitchen which is faced with reducing the corporate income-tax liability while balancing the goal of the management team to grow the business. California Pizza Kitchen is in the food industry business. California Pizza Kitchen is a casual dining restaurant chain that specializes in innovative and non-traditional pizzas. California Pizza Kitchen also …show more content…
During this period, California Pizza Kitchen’s share price declined by 10% to $22.10. Collyns needs to look at all of the factors in deciding whether to borrow on the credit line. If the decision is made to borrow, then the amount will need to be determined, in order to reduce California Pizza Kitchen’s income-tax liability. Collyns may also consider repurchasing California Pizza Kitchen shares; however, she must bear in mind management team’s goal to grow the company by not over repurchasing stock. Leveraging can affect the return on equity by decreasing the ROE percentage. Though this may not cause a major alarm, it can turn investors away from California Pizza Kitchen. This would also hold true for the cost of capital. However, the long-term benefits could outweigh the short-term decreases. As we increase debt, we will be decreasing capital and the return on equity; in turn, we will also be decreasing the taxable income (see Appendix A for calculations). The leverage beta would increase as the debt to total capital percentage increases (See Appendix A for calculations). The anticipated share price for California Pizza Kitchen in 2007 with the debt to total capital of 10% would be $21.74, with the debt to total capital of 20% would be $21.63, with the debt to total capital of 30% would be $21.52, and with the