1. How does different debt levels change CPK S ROE?

2. How does different debt levels change CPK S Beta?

3. How does different debt levels change CPK S WACC?

4. Estimate the effect of leverage on the stock-price and estimate the number of repurchased shares.

5. What capital structure should you recommend? Compare your recommendation to the reality, what is your conclusion?

UVA-F-1553 17 Exhibit 9 CALIFORNIA PIZZA KITCHEN Pro Forma Tax Shicld Effect of Recapitalization Scenarios (dollars in thousands, except share data; figures based on end of June 2007) Debt/Total C Actual 10% 20% Interest rate Tax rate (1 ) 6.16% 32.5% 6.16% 32.5% 6. 16% 32.5% 6.16% 32.5% Eanings before income taxes and interest Interest expense 30,054 30,054 30,054 4,174 25,880 30,054 9,755 20,299 Earnings before taxes 28,663 27,271 Income taxes Net income 19,359 17.480 Book value: Debt 22,589 203 45,178 180,710 225,888 67,766 Total capital 225,888 25,888 Market value: Debr) 22,589 45,178 67,766 598,002 665,769 643,773 Market value of capital 651,105 (1) Interest rate of CPK's credit facility with Bank of America: LIBOR 0.80%. Earnings before interest and taxes (EBIT) include interest income. ) Market values of debt equal book values. Actual market value of equity equals the share price ($22.10) multiplied by the current number of shares outstanding (29.13 million). Source: Case writer analysis based on CPK financial data. Page 17 of 17