Essay about California Pizza Kitchen Case Study on Capital Structure/Leveraging Debt

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A company's capital structure is a very important component of a company's financial health and longevity. The capital structure should maximize total net profit and overall shareholder wealth. An optimal proportion of equity and debt as a company's capital structure is an indication of a well-managed and successful company and should be a goal for most corporations.
Beverly Flax and Rick Rosenfield founded California Pizza Kitchen (CPK) in 1985 in Beverly Hills, California. It is a casual dining, full service restaurant concept that specializes in gourmet pizzas with unique topping combinations. They operated 213 locations in 28 states and 6 foreign countries by the end of the second quarter of 2007. Almost all of the firms revenue …show more content…
rs 9.50% 10.00% 10.63% 11.43% 12.50% 14.00%
5. rd (1−T) 4.16% 4.47% 4.86% 5.33% 6.01% 6.97%
6. WACC 9.50% 9.45% 9.47% 9.60% 9.90% 10.48%
7. Vop $643.77 $651.46 $647.80 $629.81 $590.85 $528.35
8. Debt $0.00 $65.15 $129.56 $188.94 $236.34 $264.18
9. Equity $643.77 $586.32 $518.24 $440.86 $354.51 $264.18
10. # shares 29.13 26.53 23.60 20.80 18.34 16.18
11. Stock price $22.10 $22.10 $21.96 $21.20 $19.33 $16.33
12. Net income $20.30 $27.41 $24.40 $21.04 $17.38 $13.64
13. EPS $0.70 $1.03 $1.03 $1.01 $0.95 $0.84 Notes: 1. The percent financed with equity is: ws = 1 − wd 2. The interest rate on debt, rd, is obtained from investment bankers. 3. The levered beta is estimated using Hamada's formula b = bU [1 + (1-T) (wd/ws)]. 4. The cost of equity is estimated using the CAPM rs = rRF + (RPM)b. 5. The after-tax cost of debt is rd (1−T) 6. The weighted average cost of capital is calculated as: WACC = ws rs + wd rd (1-T). 7. The value of the firm's operations is calculated as: Vop = [FCF(1+g)] / (WACC − g) 8. Debt = wd x Vop 9. The equity after the recap & repurchase is SPost = Vop − Debt = ws x Vop 10. The number of shares after the recap has been completed is found using: nPost = nPrior [(VopNew - DNew) / (VopNew-DOld). The subscript "Old" indicates values from the
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