California Pizza
1. What is going on at CPK? What decisions does Susan Collyns face?
a. Discuss the operating performance of CPK
b. Discuss management’s agenda
c. Discuss stock price performance of CPK
2. How does debt add value to CPK?
a. Add the following values to the table provide in Exhibit 9 and complete it 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 = (kd × D × t)/kd = D × t.
Post-announcement share price = PN = Pre-Announcement Price + D × t/shares outstanding.
Number of shares repurchased = D/PN.
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
b. Discuss what scenario investors would prefer and what the tradeoff is for investors as the firm adds
leverage. Conclude with which scenario you recommend and why.
3. What is the case for not doing recapitalization?