financial policy

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timer Asked: Oct 21st, 2018
account_balance_wallet $30

Question Description

All the requirements in the file. There is an excel as well. There are 3 files. the case, requirements,excel sheets.

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This spreadsheet supports STUDENT analysis of the case, "California Pizza Kitchen" (Case 33) March 31, 2008 Copyright (C) 2008, by the University of Virginia Darden School Foundation. Exhibit 2 California Pizza Kitchen, Inc. Consolidated Balance Sheet (in thousands) As of 12/31/2006 1/1/2006 Assets Current assets Cash and cash equivalents Investments in marketable securities Other receivables Inventories Current deferred tax asset, net Prepaid income tax Other prepaid expenses & other current assets Total current assets Property and equipment, net Noncurrent deferred tax asset, net Goodwill and other intangibles Other assets Total assets Liabilities and Shareholders' Equity Current liabilities Accounts payable Accrued compensation and benefits Accrued rent Deferred rent credits Other accrued liabilities Accrued income tax Total current liabilities $ $ $ Other liabilities Deferred rent credits, net of current portion Shareholders' equity: Common stock Additional paid-in-capital Accumulated deficit Accumulated comprehensive loss Total shareholders' equity Total liabilities & Shareholders' Equity Sources of data: Company Annual and Quarterly Reports. $ 11,272 11,408 4,109 3,776 8,437 1,428 5,492 45,922 213,408 4,513 5,967 4,444 274,254 7,054 13,068 13,253 4,056 9,294 $ 8,187 7/1/2007 $ 7,876 4,745 11,721 $ 5,388 37,917 10,709 4,596 11,834 8,769 6,444 49,530 255,382 5,867 5,825 5,522 310,513 271,867 6,328 5,754 6,300 339,779 $ 46,725 15,044 15,042 14,532 4,494 13,275 3,614 66,001 5,383 24,810 8,683 27,486 8,662 32,436 197 231,159 (34,013) (7) 197,336 193 221,163 (13,013) 291 228,647 (3,050) 208,343 225,888 274,254 $ 7,178 $ 310,513 $ $ 14,115 15,572 14,979 5,135 13,980 9,012 72,793 339,779 Exhibit 3 California Pizza Kitchen, Inc. Consolidated Income Statements (in thousands, except per-share data) Fiscal Year(1) 2004 2005 2003 Restaurant sales Franchise and other revenues Total revenues Three Months Ended 7/2/2006 7/1/2007 2006 $ 356,260 3,627 359,887 $ 418,799 3,653 422,452 $ 474,738 4,861 479,599 $ 547,968 6,633 554,601 $ 134,604 1,564 136,168 $ 156,592 1,989 158,581 87,806 129,702 70,273 287,781 103,813 152,949 83,054 339,816 118,480 173,751 92,827 385,058 135,848 199,744 108,558 444,150 33,090 49,272 26,214 108,576 38,426 56,912 30,773 126,111 General and administrative Depreciation and amortization Pre-opening costs 21,488 20,714 4,147 28,794 23,975 737 36,298 25,440 4,051 43,320 29,489 6,964 11,035 7,070 800 12,206 9,022 852 Severance charges(2) Loss on impairment of PP&E Store closure costs Legal settlement reserve Operating income 1,221 18,984 5,552 2,700 1,333 25,097 1,160 152 600 26,840 317 571 (349) (32) (143) 428 Food, beverage and paper supplies Labor Direct operating and occupancy Cost of Sales Interest income Other income Equity in loss of unconsolidated JV Total other income (expense) Income before income tax provision Income tax provision (benefit) Net income $ Net income per common share: Basic Diluted $ $ 5,520 (82) 5,602 $ 0.30 0.29 $ $ 25,525 7,709 17,816 0.93 0.92 707 739 1,105 (22) 1,822 $ 28,662 9,172 19,490 $ $ 1.01 0.99 768 29,971 8,687 9,622 718 287 91 718 287 91 $ 30,689 9,689 21,000 $ 8,974 2,961 6,013 $ 9,713 3,393 6,320 $ $ 1.08 1.06 $ $ 0.20 0.20 $ $ 0.22 0.21 Selected Operating Data: Restaurants open at end of period 168 171 188 205 193 213 Company-owned open at end of period(3) 137 141 157 176 162 182 Avg weekly full service rest. sales (3) 18-mo. comparable rest. sales growth(3) $ 54,896 3.4% $ 57,509 $ 8.0% 62,383 7.5% $ 65,406 5.9% $ 65,427 $ 4.8% Notes: (1) For the Years Ended December 31, 2006, January 1, 2006 and January 2, 2005, December 28, 2003. (2) Severance charges represent payments to former President/CEO and former SVP/Senior Development Officer under terms of their separation agreements. (3) Data for company-owned restaurants. Sources of data: Company Annual and Quarterly Reports and quarterly company earnings conference calls. 68,535 5.4% Exhibit 4 California Pizza Kitchen, Inc. Selected Historical Comparable Store Sales (Calendarized) CY06 CY07 CY03 CY04 CY05 Q1 Q2 Q3 Q4 Q1 California Pizza Kitchen 3.4% 9.3% 6.4% 4.8% 5.9% 5.6% 6.9% 4.7% Applebee's International, Inc. 4.1% 4.8% 1.8% 2.6% -1.8% -2.3% -1.1% -4.0% BJ's Restaurants, Inc. 3.3% 4.0% 4.6% 6.8% 5.9% 5.3% 5.5% 6.9% 2.1% 1.9% 3.2% 2.7% -2.0% -2.1% -2.1% -4.4% The Cheesecake Factory, Inc. 0.7% 3.9% 1.7% -1.3% -0.8% -1.6% 0.8% 0.4% Chipotle Mexican Grill, Inc. 24.4% 13.3% 10.2% 19.7% 14.5% 11.6% 10.1% 8.3% Darden Restaurants, Inc. -- Red Lobster 0.0% -3.9% 4.2% 1.6% 9.4% -2.1% 0.7% 4.6% Darden Restaurants, Inc. -- Olive Garden 2.2% 4.7% 8.6% 5.7% 2.5% 2.9% 2.9% 1.0% McCormick & Schmick's Seafood Restaurants, Inc. 1.1% 3.8% 3.0% 4.1% 2.8% 2.9% 2.0% 2.8% Panera Bread Company 0.2% 2.7% 7.8% 9.0% 3.2% 2.8% 2.0% 0.0% P.F. Chang's China Bistro 5.1% 3.0% 1.2% 1.3% -1.0% -0.5% -0.9% -2.5% RARE -- Longhorn Steakhouse 4.6% 5.0% 2.8% 3.7% -0.4% -0.3% 1.5% -1.0% Red Robin Gourmet Burgers 4.1% 7.5% 3.8% 4.8% 3.3% 0.8% 0.2% -0.5% Ruth's Chris Steak House, Inc. 1.4% 11.6% 10.4% 6.8% 6.0% 4.3% 7.4% 1.9% Sonic Corporation 1.6% 7.0% 5.4% 5.5% 4.3% 4.0% 3.4% 2.0% Texas Roadhouse, Inc. 3.5% 7.6% 5.6% 6.4% 1.2% 2.3% 3.3% 0.9% Brinker International (1) Note: (1) Brinker's comparable store sales is a blended rate for its various brands. Source of data: KeyBanc Capital Markets equity research. Exhibit 5 California Pizza Kitchen, Inc. Selected Forecasts for California Pizza Kitchen Firm Oppenheimer and Co. Inc. CIBC World Markets KeyBanc Capital Markets RBC Capital Markets Morgan Keegan & Co., Inc. MKM Partners Date of Price 2007E Report Target Revenues EPS 4/9/2007 $ 40 $ 4/12/2007 37 5/11/2007 NA 5/11/2007 37 5/11/2007 NA 5/11/2007 39 Source of data: Selected firms' equity research. 652.9 $ 1.33 647.5 1.29 NA 1.28 650.7 1.31 644.2 1.33 647.5 1.34 2008E Revenues EPS NA 755.1 NA 753.1 742.1 754.3 NA 1.57 1.55 1.59 1.58 1.69 2009E Revenues EPS NA NA NA NA NA NA 878.2 1.90 NA NA NA NA Exhibit 6 California Piz z a Kitche n, Inc. Stock Price Comparison Date 3-Jul-06 5-Jul-06 6-Jul-06 7-Jul-06 Value of $100 invested in CPK and S&P SmallCap 600 Restaurants Index 10-Jul-06 $140 $130 $100 CPK S&P SmallCap 600 Restaurants $80 7/3/2006 9/3/2006 10/3/2006 11/3/2006 12/3/2006 1/3/2007 2/3/2007 3/3/2007 Note: Adjusted for the June 2007 50% stock dividend. With such a dividend, an owner of two shares of CP K stock was given an additional share. The effect was to increase CP K shares by a third yet maintain the overall capitalization of the equity. Sources of data: Yahoo! Finance and Datastream. 4/3/2007 5/3/2007 6/3/2007 98 97 98 97 95 98 92 92 17-Jul-06 98 92 18-Jul-06 96 92 99 94 20-Jul-06 94 91 21-Jul-06 95 90 24-Jul-06 97 93 25-Jul-06 98 95 96 92 27-Jul-06 95 90 28-Jul-06 95 91 31-Jul-06 97 91 1-Aug-06 94 90 2-Aug-06 93 91 3-Aug-06 95 92 95 93 7-Aug-06 96 92 8-Aug-06 100 92 9-Aug-06 95 90 10-Aug-06 98 91 11-Aug-06 8/3/2006 99 97 96 97 4-Aug-06 $90 100 99 101 100 103 26-Jul-06 $110 100 13-Jul-06 14-Jul-06 19-Jul-06 $120 CP K S&P SmallCap 600 Restaurants 11-Jul-06 12-Jul-06 97 92 14-Aug-06 99 94 15-Aug-06 102 96 16-Aug-06 105 98 17-Aug-06 105 99 18-Aug-06 105 21-Aug-06 102 22-Aug-06 101 23-Aug-06 99 24-Aug-06 99 25-Aug-06 97 28-Aug-06 100 99 98 98 97 97 96 97 29-Aug-06 102 99 30-Aug-06 104 100 31-Aug-06 104 99 1-Sep-06 106 100 5-Sep-06 106 101 6-Sep-06 103 7-Sep-06 102 8-Sep-06 104 99 99 100 11-Sep-06 104 101 12-Sep-06 109 104 13-Sep-06 109 105 14-Sep-06 109 105 15-Sep-06 110 106 18-Sep-06 108 105 19-Sep-06 109 105 20-Sep-06 112 107 21-Sep-06 110 106 22-Sep-06 109 105 25-Sep-06 109 106 26-Sep-06 109 106 27-Sep-06 111 106 28-Sep-06 111 105 29-Sep-06 109 104 2-Oct-06 110 104 3-Oct-06 111 104 4-Oct-06 117 109 5-Oct-06 118 109 6-Oct-06 117 109 9-Oct-06 118 109 10-Oct-06 117 108 11-Oct-06 115 107 12-Oct-06 120 110 13-Oct-06 120 111 16-Oct-06 121 112 17-Oct-06 120 111 18-Oct-06 120 111 19-Oct-06 119 110 20-Oct-06 118 109 23-Oct-06 119 110 24-Oct-06 120 111 25-Oct-06 120 111 26-Oct-06 120 112 27-Oct-06 118 110 30-Oct-06 120 111 31-Oct-06 118 110 1-Nov-06 116 109 2-Nov-06 115 109 3-Nov-06 112 106 6-Nov-06 118 108 7-Nov-06 118 108 8-Nov-06 119 109 9-Nov-06 116 107 10-Nov-06 114 108 13-Nov-06 111 108 14-Nov-06 112 110 15-Nov-06 112 111 16-Nov-06 111 112 17-Nov-06 112 111 20-Nov-06 113 111 21-Nov-06 113 111 22-Nov-06 113 111 24-Nov-06 112 111 27-Nov-06 108 108 28-Nov-06 112 108 29-Nov-06 116 109 30-Nov-06 115 109 1-Dec-06 115 108 4-Dec-06 118 111 5-Dec-06 116 111 6-Dec-06 116 110 7-Dec-06 118 110 8-Dec-06 118 110 11-Dec-06 119 110 12-Dec-06 119 109 13-Dec-06 120 109 14-Dec-06 120 109 15-Dec-06 119 109 18-Dec-06 119 108 19-Dec-06 118 108 20-Dec-06 118 109 21-Dec-06 117 109 22-Dec-06 117 109 26-Dec-06 120 110 27-Dec-06 122 111 28-Dec-06 122 111 29-Dec-06 122 110 3-Jan-07 123 110 4-Jan-07 124 110 5-Jan-07 122 108 8-Jan-07 123 108 9-Jan-07 124 109 10-Jan-07 126 110 11-Jan-07 131 112 12-Jan-07 134 112 16-Jan-07 133 112 17-Jan-07 132 111 18-Jan-07 130 110 19-Jan-07 129 110 22-Jan-07 129 109 23-Jan-07 129 110 24-Jan-07 130 111 25-Jan-07 129 109 26-Jan-07 130 108 29-Jan-07 130 108 30-Jan-07 131 109 31-Jan-07 130 111 1-Feb-07 131 112 2-Feb-07 132 112 5-Feb-07 131 111 6-Feb-07 131 111 7-Feb-07 130 112 8-Feb-07 131 112 9-Feb-07 130 111 12-Feb-07 129 111 13-Feb-07 130 112 14-Feb-07 129 113 15-Feb-07 129 113 16-Feb-07 120 113 20-Feb-07 120 115 21-Feb-07 123 117 22-Feb-07 122 117 23-Feb-07 122 118 26-Feb-07 121 116 27-Feb-07 116 112 28-Feb-07 117 113 1-Mar-07 117 113 2-Mar-07 116 111 5-Mar-07 114 109 6-Mar-07 118 111 7-Mar-07 118 111 8-Mar-07 117 111 9-Mar-07 117 112 12-Mar-07 117 112 13-Mar-07 117 110 14-Mar-07 118 111 15-Mar-07 117 111 16-Mar-07 115 110 19-Mar-07 117 111 20-Mar-07 117 111 21-Mar-07 116 113 22-Mar-07 115 113 23-Mar-07 115 113 26-Mar-07 118 112 27-Mar-07 117 112 28-Mar-07 117 111 29-Mar-07 118 111 30-Mar-07 120 112 2-Apr-07 120 112 3-Apr-07 122 114 4-Apr-07 120 113 5-Apr-07 121 113 9-Apr-07 121 113 10-Apr-07 119 113 11-Apr-07 117 112 12-Apr-07 119 112 13-Apr-07 120 112 16-Apr-07 122 114 17-Apr-07 121 114 18-Apr-07 121 113 19-Apr-07 122 112 20-Apr-07 124 114 23-Apr-07 125 113 24-Apr-07 121 113 25-Apr-07 121 114 26-Apr-07 122 114 27-Apr-07 124 113 30-Apr-07 122 110 1-May-07 124 111 2-May-07 126 112 3-May-07 125 112 4-May-07 123 112 7-May-07 125 113 8-May-07 124 113 9-May-07 126 113 10-May-07 125 111 11-May-07 135 113 14-May-07 132 112 15-May-07 130 111 16-May-07 130 112 17-May-07 128 111 18-May-07 129 112 21-May-07 134 113 22-May-07 133 113 23-May-07 132 113 24-May-07 133 112 25-May-07 133 113 29-May-07 133 113 30-May-07 133 113 31-May-07 134 113 1-Jun-07 135 114 4-Jun-07 135 115 5-Jun-07 134 114 6-Jun-07 132 111 7-Jun-07 126 109 8-Jun-07 128 110 11-Jun-07 126 109 12-Jun-07 124 108 13-Jun-07 124 109 14-Jun-07 124 110 15-Jun-07 125 110 18-Jun-07 124 110 19-Jun-07 123 109 20-Jun-07 121 108 21-Jun-07 118 105 22-Jun-07 117 104 25-Jun-07 115 104 26-Jun-07 115 104 27-Jun-07 117 106 28-Jun-07 117 105 29-Jun-07 118 104 2-Jul-07 121 105 Exhibit 7 California Pizza Kitchen, Inc. Comparative Restaurant Financial Data, 2006 Fiscal Year (in millions, except per-share data) Fiscal Year End 7/2/2007 EBITDA Month Share Price California Pizza Kitchen Dec. $ Applebee's International, Inc. Dec. BJ's Restaurants, Inc. Dec. Brinker International(1) Earnings Dividends Margin Per Share Per Share 1,338 15.9% 6.5% 1.17 0.20 6.49 0.80 20.05 239 9.6% 4.1% 0.41 0.00 7.78 1.05 June 29.37 4,151 12.0% 4.7% 1.49 0.20 8.59 0.90 Buffalo Wild Wings, Incorporated Dec. 41.78 278 13.3% 5.8% 0.93 0.00 6.61 1.10 The Cheesecake Factory, Inc. Dec. 24.57 1,315 12.2% 6.2% 1.02 0.00 9.09 1.00 Chipotle Mexican Grill, Inc. Dec. 86.00 823 13.0% 5.0% 1.28 0.00 14.56 NA Darden Restaurants, Inc.(2) May 44.14 5,721 13.2% 5.9% 2.16 0.40 8.37 1.00 Frisch's Restaurants, Inc. May 30.54 291 31.6% 3.1% 1.78 0.44 19.84 0.60 McCormick & Schmick's Dec. 25.66 308 9.7% 4.3% 0.92 0.00 11.20 1.10 Panera Bread Company Dec. 46.02 829 16.3% 7.2% 1.87 0.00 12.53 1.25 P.F. Chang's China Bistro Dec. 35.37 938 10.5% 3.6% 1.24 0.00 11.41 1.10 Dec. 26.76 987 11.6% 5.1% 1.45 0.00 11.17 0.57 Red Robin Gourmet Burgers Dec. 40.19 619 13.7% 4.9% 1.82 0.00 14.68 1.05 Ruth's Chris Steak House, Inc. Dec. 16.80 272 15.6% 8.7% 1.01 0.00 2.93 NA Sonic Corporation Aug. 22.00 693 24.9% 11.4% 0.88 0.00 4.66 0.90 Texas Roadhouse, Inc. Dec. 12.81 597 12.5% 5.7% 0.44 0.00 4.30 0.90 Current Current Total Shr. Debt/ Interest T. Capital Return On Assets Liabilities Debt Equity Capital Coverage Turnover Capital Equity 208 0.0% NMF 2.7 10.1% 10.1% 14.0% 18.0% Applebee's International, Inc. BJ's Restaurants, Inc. Brinker International(1) Buffalo Wild Wings, Incorporated 38 $ 66 $ 0 $ 0.00 $ 7.20 Beta 24.28 $ $ Per Share 3.8% $ California Pizza Kitchen 0.71 Book Value 10.7% (3) $ Net Profit Margin 555 RARE Hospitality International Inc. 22.10 Revenue 0.85 105 187 175 487 26.5% 11.7 2.0 96 36 0 203 0.0% NMF 1.2 242 497 502 1,076 31.8% 14.4 2.6 13.2% 18.0% 4.9% 4.9% 75 26 0 116 0.0% NMF 2.4 14.0% 14.0% The Cheesecake Factory, Inc. 203 163 0 712 0.0% NMF 1.8 11.4% 11.4% Chipotle Mexican Grill, Inc. 179 61 0 474 0.0% NMF 1.7 Darden Restaurants, Inc.(2) 378 1,026 645 1,230 34.4% 10.9 3.1 Frisch's Restaurants, Inc. 12 31 43 101 30.1% 5.9 2.0 7.9% 9.1% McCormick & Schmick's 30 40 0 160 0.2% NMF 1.9 8.3% 8.3% Panera Bread Company 128 110 0 398 0.0% NMF 2.1 15.1% 15.1% P.F. Chang's China Bistro 8.8% 8.7% 20.6% 27.5% 65 104 19 290 6.2% NMF 3.0 11.1% 11.5% 125 134 166 360 31.6% 29.2 1.9 9.8% 13.9% Red Robin Gourmet Burgers 29 70 114 244 31.9% 7.7 1.7 9.3% 12.5% Ruth's Chris Steak House, Inc. 26 59 68 68 50.0% 12.8 2.0 18.6% 34.9% Sonic Corporation 43 78 159 392 28.9% 15.0 1.3 15.3% 20.1% Texas Roadhouse, Inc. 53 78 36 319 10.2% 19.9 1.7 9.7% 10.7% RARE Hospitality International Inc.(3) Notes: (1) Brinker's restaurant brands include Chili's Grill & Bar, Romano's Macaroni Grill, On The Border and Maggiano's. (2) Darden's restaurant brands include Red Lobster and The Olive Garden. (3) RARE's restaurant brands include LongHorn Steakhouse, The Capital Grille and Bugaboo Creek Steak House. Sources of data: Value Line Investment Survey , 2007; Standard & Poor's Stock Report , 2007 and company Annual Reports and websites. Exhibit 8 California Pizza Kitchen, Inc. Interest Rates and Yields 2000 2001 2002 2003 2004 2005 2006: Jan. Feb. Mar. Apr. May. June July Aug. Sept. Oct. Nov. Dec. 2007: Jan. Feb. Mar. Apr. May. June U.S. Treasury Securities Bills Notes & Bonds 3-month 6-month 3-year 10-year 30-year 5.85% 5.92% 6.22% 6.03% 5.94% 3.45% 3.39% 4.09% 5.02% 5.49% 1.62% 1.69% 3.10% 4.61% ...... 1.02% 1.06% 2.10% 4.01% ...... 1.38% 1.58% 2.78% 4.27% ...... 3.16% 3.40% 3.93% 4.29% ...... 4.20% 4.41% 4.51% 4.59% 4.72% 4.79% 4.96% 4.98% 4.82% 4.89% 4.95% 4.85% 4.96% 5.02% 4.97% 4.88% 4.77% 4.63% 4.30% 4.51% 4.61% 4.72% 4.81% 4.95% 5.09% 4.99% 4.90% 4.91% 4.96% 4.88% 4.94% 4.97% 4.90% 4.87% 4.80% 4.77% 4.35% 4.64% 4.74% 4.89% 4.97% 5.09% 5.07% 4.85% 4.69% 4.72% 4.64% 4.58% 4.79% 4.75% 4.51% 4.60% 4.69% 5.00% 4.42% 4.57% 4.72% 4.99% 5.11% 5.11% 5.09% 4.88% 4.72% 4.73% 4.60% 4.56% 4.76% 4.72% 4.56% 4.69% 4.75% 5.10% Sources of data: Economic Report of the President and Fannie Mae website. ...... 4.54% 4.73% 5.06% 5.20% 5.15% 5.13% 5.00% 4.85% 4.85% 4.69% 4.68% 4.85% 4.82% 4.72% 4.87% 4.90% 5.20% Average Corporate bonds (Moody's) Prime Aaa 3 Baa Lending 7.62% 8.36% 9.23% 7.08% 7.95% 6.91% 6.49% 7.80% 4.67% 5.67% 6.77% 4.12% 5.63% 6.39% 4.34% 5.24% 6.06% 6.19% 5.29% 5.35% 5.53% 5.84% 5.95% 5.89% 5.85% 5.68% 5.51% 5.51% 5.33% 5.32% 5.40% 5.39% 5.30% 5.47% 5.47% 5.79% 6.24% 6.27% 6.41% 6.68% 6.75% 6.78% 6.76% 6.59% 6.43% 6.42% 6.20% 6.22% 6.34% 6.28% 6.27% 6.39% 6.39% 6.70% 7.38% 7.50% 7.63% 7.75% 7.88% 7.13% 8.25% 8.25% 8.25% 8.25% 8.25% 8.25% 8.25% 8.25% 8.25% 8.25% 8.25% 8.25% Average LIBOR 3-month 6.55% 3.63% 1.79% 1.22% 1.67% 3.63% 4.68% 4.82% 4.99% 5.15% 5.23% 5.51% 5.49% 5.40% 5.37% 5.37% 5.37% 5.36% 5.36% 5.36% 5.35% 5.36% 5.36% 5.36% max min avg #REF! #REF! #REF! max min avg #REF! #REF! #REF! max min avg #REF! #REF! #REF! Exhibit 9 CALIFORNIA PIZZA KITCHEN Pro Forma Tax Shield Effect of Recapitalization Scenarios (Dollars in thousands, except share data; figures based on end of June 2007) Actual Debt/Total Capital 10% 20% 30% Interest rate (1) Tax rate 6.16% 32.5% 6.16% 32.5% 6.16% 32.5% 6.16% 32.5% Earnings before income taxes and interest (2) Interest expense 30,054 0 30,054 1,391 30,054 2,783 30,054 4,174 Earnings before taxes Income taxes Net income 30,054 9,755 20,299 28,663 9,303 19,359 27,271 8,852 18,419 25,880 8,400 17,480 0 225,888 225,888 22,589 203,299 225,888 45,178 180,710 225,888 67,766 158,122 225,888 0 22,589 45,178 67,766 643,773 643,773 628,516 651,105 613,259 658,437 598,002 665,769 Book value: Debt Equity Total capital Market value: Debt(3) (4) Equity Market value of capital Notes: (1) Interest rate of CPK's credit facility with Bank of America: LIBOR + 0.80%. (2) EBIT includes interest income. (3) Market values of debt equal book values. (4) Actual market values of equity equals the share price ($22.10) multiplied by the current number of shares outstanding (29.13 million). Source: Case writer analysis based on CPK financial data. CASE 33 CALIFORNIA PIZZA KITCHEN Guidance Sheet Synopsis and Objectives This case examines the question of financial leverage at California Pizza Kitchen (CPK) in July 2007. With a highly profitable business and an aversion to debt, CPK management is considering a debtfinanced stock buyback program. The case is intended to provide an introduction to the ModiglianiMiller capital structure irrelevance propositions and the concept of debt tax shields. With the background of a pizza company, the case provides an engaging context to discuss the “pizza graphs” that are commonly used in corporate finance curriculum to illustrate the wealth effects of capital structure decisions. The case serves to motivate the following learning objectives: • Introduce the Modigliani-Miller intuition of capital structure irrelevance; • Establish how the cost of equity is affected by capital structure decisions by defining financial risk and introducing the levered-beta capital asset pricing model (CAPM) equation; • Discuss interest tax deductibility and the valuation tax shields; • Explore the importance of debt capacity in a growing business. Questions 1. What is going on at CPK? What decisions does Susan Collyns face? In what ways can she facilit ...
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Tutorbetie
School: UC Berkeley

Attached.

Running Head: Financial Policy

1

Financial Policy
Institutional Affiliation
Date

Financial Policy

2

Introduction
California Pizza Kitchen (CPK) is a business entity led by Susan Collyns, who is the chief finance
officer. The business was founded in 1985 in the city. In early midyear 2007, the finance team led
by Susan was preparing the business’s quarterly report. The team realized that the business
experienced a fall in the share price by 10% to $22.10. Despite the fall in share price, the business
reported an impressive profit which was as a result of high revenue growth in comparison to other
rivals in the same industry. The competitors were challenged by the increasing production costs
which pushed their product services to high prices as compared CPK low prices. This gave the
business a leeway to increase its revenues and have an easy way to gain a bigger market share. In
addition, I realized the business has a management financial policy of avoiding debt by all means.
Financing Challenge at CPK
The main idea behind Susan’s mind was how to fix the challenge of stock prices which happen to
drop as per the previous 2017 second quarter report. The business requires to rethink how best it
can regain the stock prices through any fiscal policy, even if it is to do debt financing. On the other
hand, Susan was governed by the company financial policy of avoiding debt by all means.
Therefore, her main challenge was what she can do with the capital structure and the choice of the
best capital structure for the business (Campbell, 2006).
The proposal idea is to repurchase the stock prices through the acquisition of debt financing as
well as expanding the business which would increase the shareholders’ value. The business will
also realize a number of benefits from restructuring the capital structure and acquiring debt. Some
benefits such as interest tax shield will be realized, something which will boost the company’s

Financial Policy

3

earnings through reduction of financing costs. Meanwhile, the company can invest more equity
which is a ...

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