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    Midterm Case California Pizza Kitchen

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    Ahmed El Khateeb
    This case examines financial leverage decisions at California Pizza Kitchen in July 2007. CPK is highly profitable but averse to debt, so management is considering a debt-financed stock buyback. [1] The case introduces Modigliani-Miller capital structure irrelevance and debt tax shields. [2] It serves to explore how leverage affects return on equity, whether capital structure impacts shareholder value, and how debt can add value to CPK. [3] Susan Collyns, CPK's CFO, must decide whether to recommend the recapitalization plan.

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    Midterm Case California Pizza Kitchen

    Uploaded by

    Ahmed El Khateeb
    265 views2 pages
    This case examines financial leverage decisions at California Pizza Kitchen in July 2007. CPK is highly profitable but averse to debt, so management is considering a debt-financed stock buyback. [1] The case introduces Modigliani-Miller capital structure irrelevance and debt tax shields. [2] It serves to explore how leverage affects return on equity, whether capital structure impacts shareholder value, and how debt can add value to CPK. [3] Susan Collyns, CPK's CFO, must decide whether to recommend the recapitalization plan.

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    Case_33_California_Pizza_Kitchen_Guidance

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    This case examines financial leverage decisions at California Pizza Kitchen in July 2007. CPK is highly profitable but averse to debt, so management is considering a debt-financed stock buyback. [1] The case introduces Modigliani-Miller capital structure irrelevance and debt tax shields. [2] It serves to explore how leverage affects return on equity, whether capital structure impacts shareholder value, and how debt can add value to CPK. [3] Susan Collyns, CPK's CFO, must decide whether to recommend the recapitalization plan.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    265 views2 pages

    Midterm Case California Pizza Kitchen

    Uploaded by

    Ahmed El Khateeb
    This case examines financial leverage decisions at California Pizza Kitchen in July 2007. CPK is highly profitable but averse to debt, so management is considering a debt-financed stock buyback. [1] The case introduces Modigliani-Miller capital structure irrelevance and debt tax shields. [2] It serves to explore how leverage affects return on equity, whether capital structure impacts shareholder value, and how debt can add value to CPK. [3] Susan Collyns, CPK's CFO, must decide whether to recommend the recapitalization plan.

    Copyright:

    © All Rights Reserved
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    of 2

    CASE 33

    Midterm Case
    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 debt-
    financed stock buyback program. The case is intended to provide an introduction to the Modigliani-
    Miller 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
    facilitate the success of CPK? What do you recommend?

    2. Using the scenarios in case Exhibit 9, what role does leverage play in affecting the return
    on equity (ROE) for CPK?

    3. Is the capital structure decisions relevant for maximizing the shareholders’ value? What is
    the ratio of debt-to-equity that maximizes the shareholder’s value? Why should the
    stockholders care about maximizing firm value? Shouldn’t they be interested in strategies
    that maximize shareholder value only?

    What are the key drivers for increasing value of CPK how it affects its capital providers i.e.
    shareholders and creditors.

    4. How does debt add value to CPK?

    5. What is the case for not doing the recapitalization?

    6. What should Collyns recommend?


    -2-

    Please note that for the midterm exam, the case No. 33, California Pizza Kitchen has been assigned
    to you for individual case write-up and presentation.

    The case write-up and presentation will have 20% weight for the total grade of the course.

    The case presentation (no longer than 7 minutes for each student) will be on the Monday, 9th March
    or Wednesday 11th March during the regular class hours (from 8:00 to 9:20 a.m.).

    Printed and Soft copies of your report, presentations should be submitted on the Black Board using
    the SafeAssign feature Sunday 8th March before 4pm.

    _____________

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