Add the following values to the table provide in Exhibit 9 and complete it them for the actual scenario and the three proposed scenarios:

Market value of Debt/MV of Capital

Price per share

Shares repurchased (thousands)

Shares outstanding (thousands)

Earnings per share

Price to earning ratio

Beta

Cost of equity

WACC

Present value of tax shield using perpetuity formula = (k_d D t)/k_d = D t.

Post-announcement share price = P_N = Pre-Announcement Price + D t/shares outstanding.

Number of shares repurchased = D/P_N.

Cost of Equity = Risk Free Rate(Given in Ex. 8) + Beta*(MRP=5%)

WACC: Use MV weights and Debt Rate provided and Cost of Equity calculated

Discuss what scenario investors would prefer and what the tradeoff is for investors as the firm adds leverage.

Case 33 California Pizza Kitchen 465 EXHIBIT 9 | 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% 30% 6.16% 32.5% 30,054 4,174 25,880 8,400 17,480 Actual 20% Interest rate Tax rate 6.16% 32.5% 30,054 0 30,054 9,755 20,299 6.16% 32.5% 30,054 1,391 28,663 9,303 19,359 6.16% 325% 30,054 2,783 27,271 8,852 18,419 Earnings before income taxes and interest2 Interest expense Earnings before taxes Income taxes Net income Book value Debt Equity 0 225,888 225,888 22,589 203,299 225,888 45,178 180,710 225,888 67,766 158,122 225,888 Total capital Market value: Debt Equity 22,589 628,516 651,105 45,178 613,259 658,437 67,766 598,002 665,769 643,773 Market value of capital 643,773 Notes: 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 Case 33 California Pizza Kitchen 465 EXHIBIT 9 | 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% 30% 6.16% 32.5% 30,054 4,174 25,880 8,400 17,480 Actual 20% Interest rate Tax rate 6.16% 32.5% 30,054 0 30,054 9,755 20,299 6.16% 32.5% 30,054 1,391 28,663 9,303 19,359 6.16% 325% 30,054 2,783 27,271 8,852 18,419 Earnings before income taxes and interest2 Interest expense Earnings before taxes Income taxes Net income Book value Debt Equity 0 225,888 225,888 22,589 203,299 225,888 45,178 180,710 225,888 67,766 158,122 225,888 Total capital Market value: Debt Equity 22,589 628,516 651,105 45,178 613,259 658,437 67,766 598,002 665,769 643,773 Market value of capital 643,773 Notes: 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