1.Beta is a measure of systematic risk. A beta of 1 implies that a stock is as risky as the overall market, a beta higher than one is that the stock is riskier than the market, while beta less than one implies it is less riskier than the market. Use information outside the case to understand more about beta. Can you explain which would have a higher beta -- full service or limited service restaurants? Why?

2.At what point do you think the bankruptcy costs will outweigh the interest tax shield? Why?

3.Why is it assumed that CPK will receive interest on loan at LIBOR+0.80% (exhibit 9)?

Exhibit 9 CALIFORNIA PIZZA KITCHEN Pro Forma Tax Shield Effect of Recapitalization Scenarios (dollars in thousands, except share data; figures based on end of June 2007) Debt/Total Capital 10% 20% Actual 30% Interest rate (1) Tax rate 6.16% 32.5% 6.16% 32.5% 6.16% 32.5% 6.16% 32.5% 30,054 Earnings before income taxes and interest Interest expense Earnings before taxes Income taxes Net income 30,054 9,755 20,299 30,054 1,391 28,663 9,303 19,359 30,054 2,783 27,271 8,852 18,419 30,054 4,174 25,880 8,400 17,480 Book value: Debt Equity Total capital 225,888 225,888 22,589 203,299 225,888 45,178 180,710 225,888 67,766 158,122 225,888 Market value: 67,766 Debt(3) Equity(4) 643,773 643,773 22,589 628,516 651,105 45,178 613,259 658,437 598,002 665,769 Market value of capital Notes: ) Interest rate of CPK's credit facility with Bank of America: LIBOR + 0.80%. (4) Earnings before interest and taxes (EBIT) include interest income. ( Market values of debt equal book values. (4) 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. Exhibit 9 CALIFORNIA PIZZA KITCHEN Pro Forma Tax Shield Effect of Recapitalization Scenarios (dollars in thousands, except share data; figures based on end of June 2007) Debt/Total Capital 10% 20% Actual 30% Interest rate (1) Tax rate 6.16% 32.5% 6.16% 32.5% 6.16% 32.5% 6.16% 32.5% 30,054 Earnings before income taxes and interest Interest expense Earnings before taxes Income taxes Net income 30,054 9,755 20,299 30,054 1,391 28,663 9,303 19,359 30,054 2,783 27,271 8,852 18,419 30,054 4,174 25,880 8,400 17,480 Book value: Debt Equity Total capital 225,888 225,888 22,589 203,299 225,888 45,178 180,710 225,888 67,766 158,122 225,888 Market value: 67,766 Debt(3) Equity(4) 643,773 643,773 22,589 628,516 651,105 45,178 613,259 658,437 598,002 665,769 Market value of capital Notes: ) Interest rate of CPK's credit facility with Bank of America: LIBOR + 0.80%. (4) Earnings before interest and taxes (EBIT) include interest income. ( Market values of debt equal book values. (4) 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