California Pizza Kitchen

EXECUTIVE SUMMARY

California Pizza Kitchen is a California based restaurant chain catering to both limited-service and full-service segments of the restaurant industry. It is present in 213 locations in 28 states of USA and 6 foreign countries. The casual dining model is known for its family friendly surroundings, excellent ingredients and inventive offerings.

California Pizza Kitchen earned its revenues from 3 sources: sales at company-owned restaurants, royalties from franchise restaurant and royalties from a partnership with Kraft Food to sell CPK-branded frozen pizzas in grocery stores.

The management believed its success in growing both domestically and internationally. Despite industry challenges of rising commodity, labor and energy costs, CPK was about to announce near-record quarterly profits of over $6 million.

The company and investment community were upbeat about CPK’s success and future prospect. The company is considering evaluating its debt capacity to fund its growth opportunities.

Important Fact

The company had prepared development plans for opening a total of 16 to 18 new locations in 2007. It anticipated about $85 million in capital expenditures for its 2007 growth plan. CPK enjoyed borrowing capacity available under an existing $75 million line of credit. Currently CPK’s share price had decreased 10% in the month of June. Because of the drop in share price, the management debated to repurchase share. Since the company did not have much cash, a large share repurchase program required financing by debt. The company believed in “staying power” and had till then avoided debt. The firm had recently issued a 50% stock dividend which had effectively split CPK shares on a 3-for-2 shares basis. CPK investors received one additional share for every two shares of common stock held.

Alternative Solutions

1)      Currently debt is calculated on book value of total capital. Hence, even after 30% D/E we are not meeting 85million USD debt target. Alternatively, had we taken debt on the market value of equity we could have achieved debt target of 85 million USD at 13.2% of equity market value.

2)      Issuance of bond could have been other option. As seen from Exhibit 8, for Bond rating AAA interest is 5.79% which is less than cost of debt 6.16% but in case of any contingent situation if bond rating falls to BAA ,bond interest would increase to 6.7% which would be more than 6.16% so we are discarding bond issuance option (considering bond interest rate is floating).