What Is Going on at Cpk? What Decisions Does Susan Collyns Face?

What is going on at CPK? What decisions does Susan Collyns face?

California Pizza Kitchen (CPK) is an American based restaurant which has made a name in serving different types of pizzas, pastas and fast food products. The company is not only dealing within United States but it is also serving in six different foreign countries. CPK has its own stores, as well as it also has different franchises across the United States and also is involved in a partnership with Kraft Foods to sell its frozen products in its stores.

However, in recent years, a number of forces has challenged restaurant industry executives, including increase of commodity prices, higher labor cost, softening demand due to high gas prices, deteriorating housing wealth and intense interest in the industry by activist shareholders

Chief Financial Officer Susan Collyns then faces a decision regarding CPK’s capital structure. The data shows that CPK generated 10.1% ROE without involving in any financial leverage, so we can assume that CPK is an unlevered firm. Moreover, the company also maintained its borrowing capacity of $75 million line of credit. This means that CPK was able to deal with tough macroeconomic environments better than its peers and competitors.

However, a 10% decline in share price seemed to triggered the company’s intention of repurchasing shares and perhaps leverage the balance sheet with its plentiful borrowing allowances. If Susan Collyns decided to alter the company’s capital structure, borrowing money would result in reduction of income-tax liability. The tax shield scenerios illlustrates in Exhibit 9 shows the company’s financial summaries under this alternative decision. On the other hand, CPK still needs to preserve its ability to fund the company’s operating plans in the future. Therefore, any use of financing to return capital to shareholders needed to be balanced with management’s goal of growing the