Case 33

1. In what ways can Susan Collyns facilitate the success of CPK? a. The avoidance of CPK management to putting any debt in its Balance sheet which relates to the idea of maintaining the borrowing ability needed to support CPK’s expected growth trail but Collyn is convinced with the benefits of leveraging the CPK’s equity; b. Maintain the ASAP restaurants where brand extensions of the company are being disposed. The ASAP restaurants in airport locations numbered 16 and contributed to the revenue and to the success of CPK; c. Maintain the company-owned full-service CPK restaurants which are 170 units and still cite for expansion in other locations locally and internationally; d. Allot more or spend more on marketing the CPK frozen pizza brand; e. Continue to create new menus with high quality ingredients which can leave a mark to customers’ tastes. In this way, customers will likely to come back; f. CPK can spend 3% to 4% of sales on advertising just like what its competitors like Chili’s, Red Lobster, Olive Garden and Outback Steakhouse spent yearly; g. On the financial side, the management should increase its ROE by letting its assets exceed its equity base in the Balance Sheet; h. Leveraging by borrowing to acquire more assets is one way to increase ROE. One benefit with leveraging is that, it reduces the corporate income tax liability of CPK, which had been almost $10 million in 2006.

2. Using the scenarios in case Exhibit 9, what role does leverage play in affecting the return on equity (ROE) for CPK?
The operating leverage effect on ROE is percentage change of EBIT is more than percentage change in Sale. If percentage change of EBIT is more than the percentage change in sales, this operating leverage will affect ROE positively because at this level, per unit fixed cost will decrease and small increase in sale will boost EBIT. If EBIT will increase, ROE will also increase. After dividing percentage change of EBIT with