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California pizza kitchen case study analysis

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Running head: CALIFORNIA PIZZA KITCHEN CASE STUDY ANALYSIS 1
California Pizza Kitchen Case Study Analysis
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CALIFORNIA PIZZA KITCHEN CASE STUDY ANALYSIS 2
California Pizza Kitchen Case Study Analysis
Introduction
California Pizza Kitchen, also known as CPK, was established in 1985 in California,
United States. CPK had launched about 213 retail outlets globally by the mid-2007. Currently, its
management is contemplating over opening another 500 branches in different countries around
the world. CPK aims at open between 16 and 18 outlets in various locations and closing down
one outlet annually. Although CPK is ranked above its rivals in the industry, it has been
experiencing a major depression. Recently, its stock reduced to $22.10 (Morningstar, 2017).
Additionally, it has performed better than most of its rivals despite the intense competition and
the uncertainties in the restaurant chain industry. However, CPK needs to develop an appropriate
capital structure and manage its finances efficiently. Thus, it is important to assess the effect of
altering CPK’s capital structure by repurchasing its share at the prevailing market price. The
assessment will encompass the cost of capital, return on equity (ROE), earnings per share (EPS),
and earnings before interest and taxes EBIT breakeven.
Value Addition by Debt to CPK
Companies always use different techniques to increase their earnings per share from their
interest tax shields. Levelling up and repurchasing of the stock rationally is one of the
techniques. This always makes the cost of issuing debt cheaper as compared to the cost of equity.
Similarly, the interest tax shield lessens the taxable income leading to a corresponding increase
in cases where the debt is used in repurchasing outstanding shares. Equally, an increase in the
earnings per share results in an increase in the return on equity (PrivCo, n.d).
Cost of Capital
California Pizza Kitchen’s liability financing rate is 6.16 while its cost of equity is 5.03
percent. According to the weighted average cost of capital (WACC) calculation with tax neglect,

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Running head: CALIFORNIA PIZZA KITCHEN CASE STUDY ANALYSIS California Pizza Kitchen Case Study Analysis Student’s Name Institutional Affiliation 1 CALIFORNIA PIZZA KITCHEN CASE STUDY ANALYSIS 2 California Pizza Kitchen Case Study Analysis Introduction California Pizza Kitchen, also known as CPK, was established in 1985 in California, United States. CPK had launched about 213 retail outlets globally by the mid-2007. Currently, its management is contemplating over opening another 500 branches in different countries around the world. CPK aims at open between 16 and 18 outlets in various locations and closing down one outlet annually. Although CPK is ranked above its rivals in the industry, it has been experiencing a major depression. Recently, its stock reduced to $22.10 (Morningstar, 2017). Additionally, it has performed better than most of its rivals despite the intense competition and the uncertainties in the restaurant chain industry. However, CPK needs to develop an appropriate capital structure and manage its finances efficiently. Thus, it is important to assess the effect of altering CPK’s capital structure by repurchasing its share at the prevailing market price. The assessment will encompass the cost of capital, return on equity (ROE), earnings per share (EPS), and earnings before interest and taxes EBIT breakeven. Value Addition by Debt to CPK Companies always use different techniques to increase their earnings per share from their interest tax shields. Level ...
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