Summary of case 33-California Pizza Kitchen

You should write one paragraph about the story of this case.

In your summary, you should answer the following questions:

1.In what ways can Susan Collyns facilitate the success of CPK?

2.Using the scenarios in case Exhibit 9, what role does leverage play in affecting the return on equity (ROE) for CPK? What about the cost of capital? In assessing the effect of leverage on the cost of capital, you may assume that a firm's CAPM beta can be modeled in the following manner:b_L=b_U[1 + (1 T)D/E], whereb_Uis the firm's beta without leverage,Tis the corporate income tax rate,Dis the market value of debt, andEis the market value of equity.

3.How does debt add value to CPK?

a. Financial leverage and financial risk

b. The effects of tax shields on value and the cost of capital

4.What is the case for not doing the recapitalization?

5.Based on the analysis in case Exhibit 9, what is the anticipated CPK share price under each scenario? How many shares will CPK be likely to repurchase under each scenario? What role does the tax deductibility of interest play in encouraging debt financing at CPK?

6.What capital structure policy would you recommend for CPK?