As the CFO, you, Susan Collyns, can continue the success of California Pizza Kitchen by suggesting the company add debt to its balance sheet. The low interest rates because of the recession make our proposal the most attractive since CPK can issue debt at a low cost. Since the company currently has no debt, a modest increase in debt would not be very risky and it would increase the value of CPK due to decreased taxes. You can take this proposal one step further and use the added debt load to repurchase shares of CPK from investors. This move would please the shareholders since their shares would represent a larger stake in the company due to the decreased overall shares outstanding. The results of the share repurchase would be seen in the form of a higher stock price. We have outlined the reasons why you should adopt our proposal of a modest increase in debt in the sections below. Keep in mind that any increase in debt will most likely be opposed by the CEO, Rick Rosenfeld. Mr. Rosenfeld’s philosophies go against our proposal because he dislikes any amount of debt due to his want to maintain CPK’s borrowing ability, or staying power. He argues that a restaurant’s success depends on having capital and staying power and the staying power of CPK will be reduced if the company adds any debt. For this reason, we will show you the added benefits to shareholders at different debt loads of 10%, 20%, and 30% debt to total capital levels.
As the CFO, you, Susan Collyns, can continue the success of California Pizza Kitchen by suggesting the company add debt to its balance sheet. The low interest rates because of the recession make our proposal the most attractive since CPK can issue debt at a low cost. Since the company currently has no debt, a modest increase in debt would not be very risky and it would increase the value of CPK due to decreased taxes. You can take this proposal one step further and use the added debt load to repurchase shares of CPK from investors. This move would please the shareholders since their shares would represent a larger stake in the company due to the decreased overall shares outstanding. The results of the share repurchase would be seen in the form of a higher stock price. We have outlined the reasons why you should adopt our proposal of a modest increase in debt in the sections below. Keep in mind that any increase in debt will most likely be opposed by the CEO, Rick Rosenfeld. Mr. Rosenfeld’s philosophies go against our proposal because he dislikes any amount of debt due to his want to maintain CPK’s borrowing ability, or staying power. He argues that a restaurant’s success depends on having capital and staying power and the staying power of CPK will be reduced if the company adds any debt. For this reason, we will show you the added benefits to shareholders at different debt loads of 10%, 20%, and 30% debt to total capital levels.
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