California Pizza Kitchen Case Solution And Analysis, HBR Case Study Solution & Analysis of Harvard Case Studies

California Pizza Kitchen

California Pizza Kitchen (CPK) is an American based restaurant which has made a name in serving different types of pizzas, pastas and fast food products. California Pizza Kitchen (CPK) was found in 1985 in the California near Beverly Hills. The company is not only dealing within United States but it is also serving in six different foreign countries. California Pizza Kitchen has its own stores, as well as it also has different franchises across the United States and also is involved in a partnership with Kraft Foods to sell its frozen products in its stores. Restaurants of the California Pizza Kitchen have friendly environment, delicious dishes and outstanding offerings.

cpk case solution

California Pizza Kitchen has its franchises in numerous countries that include China, Hong Kong, Malaysia, Singapore, Philippines and numerous others. California Pizza Kitchen has also opened in parts of South Korea and the Mexico City. The franchise owners give an advance of approximately $50,000 to $65,000 and furthermore, they also pay 5% of their sales to the California Pizza Kitchen as royalty payments.

As mentioned above, California Pizza Kitchen has also been involved in the partnership with the Kraft. California Pizza Kitchen has issued license to Kraft to distribute its frozen pizza in its stores. Kraft pays royalties to the California Pizza Kitchen as per the agreement.

Susan Collin as the Chief Financial Officer at California Pizza Kitchen (CPK) is facing a dilemma. The industry is facing problems because of the rising prices of the commodities, labor, power sector and other costs; but still California Pizza Kitchen (CPK) has performed well. Previously the company had no debt to sustain its share price of the company in the market but now it is looking forward to issue new debt. The California Pizza Kitchen (CPK) has previously been following a very conservative approach, to keep the company unlevered. Therefore the balance sheet of the California Pizza Kitchen (CPK) is very strong as far as borrowing ability of the company is concerned.

Problem Statement:

Faced with the tougher conditions of the industry, the share price of California Pizza Kitchen (CPK) has decreased approximately 10 percent in the recent period; hence the company has decided to buy back its shares to strengthen/ consolidate the market share prices of the California Pizza Kitchen (CPK). Susan Collins, the chief financial officer of California Pizza Kitchen has concerns about the 10% decrease in the share price of the company, and also her main concern is about the ideal time to repurchase floating shares of the company by issuing new debt in the market as the company has no debt in its balance sheet.

Analysis:

The capital structure of California Pizza Kitchen is completely equity financed as the policy of the company had been to adopt a conservative approach. Now California Pizza Kitchen (CPK) is expanding its business throughout the world to increase its market share and create awareness of its brand in the minds of the customers. The expansion should be done through either the equity financing or debt financing. Due to the critical market situation of the California Pizza Kitchen, share price has already decreased by approximately 10 percent; therefore equity financing is not suitable for the California Pizza Kitchen to raise the financing for expansion. Therefore, the most suitable mode of financing for the California Pizza Kitchen is to raise the financing through debt. Debt financing is the cheapest source of financing as compared to the equity financing. California Pizza Kitchen should get the debt in the capital structure in appropriate proportion to equity and repurchase the floating shares through the financing received from the debt issuance to retain its original share price.

The appropriate debt in the capital structure of the California Pizza Kitchen would increase the profitability and wealth of the shareholders. Earnings of the California Pizza Kitchen would increase with the increase in debts in the capital structure of the company, as the interest payment on debts are tax deductibles. Therefore, California Pizza Kitchen will save tax payment by the tax shield on interest payment of debts; on the other hand, outstanding shares of the company will decrease due to the repurchase of shares. Return on equity of the company will increases as the earnings per share would increase and the number of outstanding shares would decrease, as the earnings are spread over a less number of outstanding shares, the return on equity of the company would increase.

Alternatives:

Susan Collyns, has three alternative strategies to choose from, through which the expansion and growth of the company is to be financed to repurchase the shares of the company....................

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This case is the question of financial leverage in the California Pizza Kitchen (CPK) in July 2007. With a highly profitable business and an aversion to debt, CPK management considers a debt-financed share repurchase program. Case is designed to ensure the introduction of Modigliani and Miller capital structure irrelevance proposals and concept boards of tax arrears. Against the background of Pizza Company, housing provides an attractive context for the discussion of the "pizza graphs", which are widely used in corporate finance training programs to illustrate the effect of wealth-making, capital structure. "Hide
by Michael J. Schill, Elizabeth Shumadine Source: Darden School of Business 17 pages. Publication Date: September 2, 2008. Prod. #: UV1203-PDF-ENG