California Pizza Kitchen

2) The higher ratio of Debt to Total Equity may result to the lower of the debt credit rating. The lower of the credit rating will result to increase of the interest rate which will cost more to the company.

General speaking, WACC is the rate that a company’s shareholders expect to be paid on average to finance its assets, and it is the overall required return on the firm as a whole. Therefore, company directors often use WACC to determine whether a financial decision is feasible or not. In this case, I will choose 9.38% as discount rate. The reason why I choose 9.38% as discount rate is because the estimated Debt/Equity is 26% under the assumptions by CFO Sheila Dowling, which is most close to 25% of Debt/Equity from the projected WACC schedule. There might be some flaws existing by using WACC as discount rate. As we know, the cost of debt would be raised significantly as the leverage increased. The investment will definitely increase the firm’s current debt. So, the cost of debt would not keep at 7.75%.

If the leverage increases from expected level, D/C will increase, the levered beta will increase, the cost of equity will increase, the after-tax cost of debt will keep the same. In addition, the weight of the after-tax cost of debt will increase and the weight of the cost of equity will decrease. It looks like that it is difficult to determine how WACC will change. However, according to the Figure 3-8 about the effects of capital structure in Chapter 15, we can find that when the debt ratio is 40%, WACC reaches the minimum value, so in this case, when the leverage change from 20% to 40%, WACC will decrease, and when the leverage bigger than 40%, WACC will increase.

“When a company issues additional shares, this reduces an existing investor’s promotional ownership in that company” (Diluted Earnings Per Share - Diluted EPS. (2015)) This means that in the case were we found the earnings per share of a company to have decreased as new capital was raised; it led to the investor’s share to have decreased as well, because now, instead of having say 10% of ownership in a company; but because more shares are added so that the company can raise capital, the ownership decreases (unless the investor buys all the additional shares) to say 5%.

The mixture of debt-equity mix is important so as to maximize the stock price of the Costco. However, it will be significant to consider the Weighted Average Cost of Capital (WACC) as well so that it can evaluate the company targeted capital structure. Cost of capital (OC) may be used by the companies as for long term decision making, so industries that faced to take the important of Cost of capital seriously may not make the right choice by choosing the right project(Gitman’s, ).

“Hi, welcome to CiCi’s!” This is the warm greeting that every CiCi’s employee will welcome every customer with when they walk through the door. This warm welcome is just one of the many things that CiCi’s does to exceed the customer service expectations that come with a buffet style restaurant. With competition lurking, and the economy pinching, great customer service has become a premium. This is why CiCi’s focuses so much on the customer’s wants and needs. The mission statement

At first, WACC and CAPM was attempted to be used as a source of cost of capital. However, for WACC, there is no available proportion of debt and cost of debt for MW. For CAPM, no available data seems to support the acceptable

Notes and Hints: The WACC is equal to the weighted average of the component capital costs, e.g., the weight in debt times the after-tax cost of debt financing plus the weight in equity times the after-tax cost of equity financing corresponding to the leverage: WACC = (D/V)*Rd*(1− tax rate) + Re*(E/V), where “tax rate” = marginal corporate tax rate (assume 34%), Rd = the before-tax cost of debt (info about the premium above long-term government rates is provided in tables), Re is the cost of equity, D and E are the market values of debt and equity. V = (E + D). Remember that the higher leverage means the higher equity risk (and cost of equity Re) and that you will have to “un-lever” and “re-lever” your firm’s cost of equity and any other firm (pure-plays) when evaluating a project in a specific division. Note that your firm (and comparable “pure-play” firms) may have different leverage (capital structures) than the target leverage of your firm and estimated equity ‘betas’ will reflect the past leverage!! Also, your firm may have several divisions and the individual divisional projects may have different risks and thus different costs of capital!! Pay special attention to the information and questions under the “The 777” case segment (pages 6-9). State your parameters & assumptions very clearly. Someone looking at your analysis should be

On the other hand, more debt does not affect the risk of the project under taken, but means less equity holders , these bring more risk to equity holders, the cost of equity increases with debt. assume Ra is the WACC without leverage.

California Pizza Kitchen has been operating since 1985 predominantly in California. As of June 2007, they had 213 retail locations in the US and abroad. Analysts have put estimates on the potential of 500 full service locations. CPK's strategy includes the opening of 16 to 18 new locations this year including the closing of one location. In the second quarter of 2007, revenue increased 16% while comparable restaurant sales grew by 5%. Performing comparatively well against its competitors, CPK's stock has been depressed recently falling to $22.10 in June making their P/E equal to 31.9 time current earnings. In comparison with BJ's Restaurants with a P/E of 48.9, CPK appears undervalued. CPK's direct

There are two ways of increasing capital, (1) using debt and (2) issuing new shares. For profitable companies sometimes it is cheaper to use debt instead of issuing new shares since cost of debt is tax shielded. In this case company didn’t have any debt in past which means less default risk, it will affect total value in a positive way. It will decrease the taxes paid and increase net income, accordingly share values.

WACC calculations entailed several different steps prior to using the actual WACC formula. First, by using CPP’s balance sheet we identified its D/E, by dividing Debt portion by the Equity portion arriving at 2.07, than we calculated D/V – 0.67 and E/V – 0.33. Afterwards, we used comparable firm Wackenhut’s capital structure for our analysis and applied it to our calculations. Wackenhut’s capital structure consisted of 92% equity and 8% debt. Subsequently, we went through the Beta unlevering and then levering process using above capital structure. To unlever, we multiplied given beta of 0.89 by the debt portion of capital structure 0.92, than we relevered the Beta_e=(1+D/E 2.07) * unlevered Beta 0.82 = 2.51. Next step consisted of calculating R_e=R_f+beta_e*MRP= 8.6%(given)+2.51*7.5% (given)=27.41%.

Generally, firms can choose among various capital structures in order to maximize overall market value of the company. It is proposed however, that

Static trading theory is a theory of finance based on the work of economists of Modigliani and Miller. With the theory of static trading, and since corporate debt repayment is a deductible tax and there is less risk involved in taking debt on equity, debt financing is initially cheaper than equity financing. This means that companies can reduce the weighted average cost of capital (WACC) through capital structure with debt on equity. However, increasing the amount of debt also increases the risk to the company, somewhat offsets the WACC decline. Thus, static trading theory identifies a mix of debt and equity where the WACC decline offsets the increased financial risk to the

Already in 1958, Modigliani and Miller have pointed the discussion of capital structure towards the cost of debt and equity. According to their first proposition, in a world of no corporate taxes and with perfect markets, financial leverage has no effect on a firm’s value. In their second proposition, they state that the cost of equity equals a linear function defined by the required return on assets and the cost of debt (Modigliani and Miller, 1958).