Business Case Studies & Business Publications

California Pizza Kitchen

Schill, Michael J....

Case

California Pizza Kitchen

Schill, Michael J.; Shumadine, Elizabeth

F-1553 | Published September 2, 2008 | 16 pages Case

Collection: Darden School of Business

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This case examines the question of financial leverage at California Pizza Kitchen (CPK) in July 2007. With a highly profitable business and an aversion to debt, CPK management is considering a debt-financed stock buyback program. The case is intended to provide an introduction to the Modigliani and Miller capital structure irrelevance propositions and the concept of debt tax shields. With the background of a pizza company, the case provides an engaging context to discuss the “pizza graphs” that are commonly used in corporate finance curriculum to illustrate the wealth effects of capital structure decisions.

The case serves to motivate the following teaching objectives: 1. Introduce the Modigliani-Miller intuition of capital structure irrelevance; 2. Establish how the cost of equity is affected by capital structure decisions by defining financial risk and introducing the levered-beta capital asset pricing model (CAPM) equation; 3. Discuss interest tax deductibility and the valuation tax shields; 4. Explore the importance of debt capacity in a growing business.