FIN 473
California Pizza Kitchens Case Questions
In 2007 California Pizza Kitchen was experiencing record growth and profits, however, their stock price experienced a 10% drop. Up until this time CPK had avoided taking on debt, but with this stock dip management is considering a stock repurchase program. CPK had practiced conservative fiscal policy to ensure “staying power;” but with interest rates set to rise and competition falling behind, this could be the perfect time to take on more risk. With this in mind, CFO Susan Collyns is considering levering her company’s equity by purchasing stock with debt.
2) How does Debt add value at CPK? (values in thousands) - Do Nothing: ROE, WACC
ROE: NI/BVofE (20299/225888)= 8.99%
ROE: NI/MVofE (20299/643773)= 3.15%
WACC: 9.52%
COE: .85(10.3-5.1)+5.1=9.52%
- Add $45,177,600 in Debt (20% Debt/Total Book Capital): New ROE, Present Value of Tax Shields, # shares outstanding after repurchase, Expected Post-Issuance Stock Price, BetaLev, REquity, and new WACC. (Note: Use Rf of 10 yr. UST Note, and an expected Rm=10.3%. Also, assume debt is issued, and THEN stock shares are repurchased
ROE: NI/BVofE (18419/180710)=10.19%
ROE: NI/MVofE (18419/613259)=3.00%
PVTS: TaxRate*MVdebt (.325*45179)=$14,682.85
# of shares outstanding after repurchase: Previous outstanding shares -MVdebt/OriginalPrice
29,130-45,178/22.1= 27,086
New stock price: (UnleveredValue+PVTS)/outstanding shares
(643,773+14,682)/27086=$24.31
Levered Beta: .85(1+(1-.325)*(45,178/613,259))= .892
WACC: (with debt) 9.36%
3) Briefly, what is the case for not doing the stock repurchase with added Debt? Repurchasing stock is not the only way that CPK can take. According to exhibit 7, there is no cash or stock dividend share in CPK. Therefore, CPK can issue more dividends. This would decrease the company’s equity, potentially decreasing the rate of growth, however the payment of dividends would be
In 2007 California Pizza Kitchen was experiencing record growth and profits, however, their stock price experienced a 10% drop. Up until this time CPK had avoided taking on debt, but with this stock dip management is considering a stock repurchase program. CPK had practiced conservative fiscal policy to ensure “staying power;” but with interest rates set to rise and competition falling behind, this could be the perfect time to take on more risk. With this in mind, CFO Susan Collyns is considering levering her company’s equity by purchasing stock with debt.
2) How does Debt add value at CPK? (values in thousands) - Do Nothing: ROE, WACC
ROE: NI/BVofE (20299/225888)= 8.99%
ROE: NI/MVofE (20299/643773)= 3.15%
WACC: 9.52%
COE: .85(10.3-5.1)+5.1=9.52%
- Add $45,177,600 in Debt (20% Debt/Total Book Capital): New ROE, Present Value of Tax Shields, # shares outstanding after repurchase, Expected Post-Issuance Stock Price, BetaLev, REquity, and new WACC. (Note: Use Rf of 10 yr. UST Note, and an expected Rm=10.3%. Also, assume debt is issued, and THEN stock shares are repurchased
ROE: NI/BVofE (18419/180710)=10.19%
ROE: NI/MVofE (18419/613259)=3.00%
PVTS: TaxRate*MVdebt (.325*45179)=$14,682.85
# of shares outstanding after repurchase: Previous outstanding shares -MVdebt/OriginalPrice
29,130-45,178/22.1= 27,086
New stock price: (UnleveredValue+PVTS)/outstanding shares
(643,773+14,682)/27086=$24.31
Levered Beta: .85(1+(1-.325)*(45,178/613,259))= .892
WACC: (with debt) 9.36%
3) Briefly, what is the case for not doing the stock repurchase with added Debt? Repurchasing stock is not the only way that CPK can take. According to exhibit 7, there is no cash or stock dividend share in CPK. Therefore, CPK can issue more dividends. This would decrease the company’s equity, potentially decreasing the rate of growth, however the payment of dividends would be