The image is Exhibit 32.9.

WACC and Cost of Equity are intended to be used through MM Proposition II with Taxes

Ex: WACC=S/(S+B)Rs+B/(S+B)Rb(1-tax)

No need to compute levered beta or use a risk-free rate or market return.

3. Using the scenarios in case Exhibit 32.9, what role does leverage play in affecting the cost of equity and the weighted average cost capital (WACC) for CPK? Use market values of debt and equity to compute the cost of equity and WACC. California Pizza Kitchen Pro Forma Tax Shield Effect of Recapitalization Scenarios (dollars in thousands, except share data; figures based on end of June 2007) Interest rate Tax rate Earnings before income taxes and interest Interest expense Earnings before taxes Income taxes Net income Actual 6.16% 32.5% 30,054 0 30,054 9,755 20,299 Debt/Total Capital 10% 20% 30% 6.16% 6.16% 6.16% 32.5% 32.5% 32.5% 30,054 30,054 30,054 1,391 2,783 4,174 28,663 27,271 25,880 9,303 8,852 8,400 19,359 18,419 17,480 Book value: Debt Equity Total capital 0 225,888 225,888 22,589 203,299 225,888 45,178 180,710 225,888 67,766 158,122 225,888 Market value: Debt Equity Market value of capital 0 643,773 643,773 22,589 628,516 651,105 45,178 613,259 658,437 67,766 598,002 665,769 Cost of equity WACC 9.5% 9.5% 3. Using the scenarios in case Exhibit 32.9, what role does leverage play in affecting the cost of equity and the weighted average cost capital (WACC) for CPK? Use market values of debt and equity to compute the cost of equity and WACC. California Pizza Kitchen Pro Forma Tax Shield Effect of Recapitalization Scenarios (dollars in thousands, except share data; figures based on end of June 2007) Interest rate Tax rate Earnings before income taxes and interest Interest expense Earnings before taxes Income taxes Net income Actual 6.16% 32.5% 30,054 0 30,054 9,755 20,299 Debt/Total Capital 10% 20% 30% 6.16% 6.16% 6.16% 32.5% 32.5% 32.5% 30,054 30,054 30,054 1,391 2,783 4,174 28,663 27,271 25,880 9,303 8,852 8,400 19,359 18,419 17,480 Book value: Debt Equity Total capital 0 225,888 225,888 22,589 203,299 225,888 45,178 180,710 225,888 67,766 158,122 225,888 Market value: Debt Equity Market value of capital 0 643,773 643,773 22,589 628,516 651,105 45,178 613,259 658,437 67,766 598,002 665,769 Cost of equity WACC 9.5% 9.5%