SOLVE Q 2AND 3 IN 4HOURS!!
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presentationmidterm.pptxFINANCIAL POLICY
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1
INTRODUCTION
CPK is California Pizza Kitchen, led to by Susan Collyns, the Chief Financial officer
Despite the share price of the firm declined 10% during the month of June to a current value of $22.10
CPK has impressively led by strong revenue growth in comparison to other competitors in the industry which was going through increased in prices of commodities, and production costs
2
Decisions Susan facing at CPK
Susan must fix are how to do to regain CPK’s stock shares that had been dropped by 10%.
has to decide whether or not to green light on repurchasing program which could probably need to decide to do a debt finally despite the fact that the firm’s financial policy was to avoid adding any debt to the firm whereby her main problem is to do with the capital structure of the company.
3
Ways through which Susan can facilitate the success of CPK and recommendation
Susan should approach debt financing to repurchase the completed stock to regain the share price, added the money in to expand the branches, the copiloted gain benefits from making the decision of doing a capital restructuring: debt financing, share interest tax shield.
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Role of leverage in affecting the return on equity (ROE)
risk control
leverage increases stock volatility thus increasing the company’s return on equity
financial leverage increases stock volatility which corresponds to with high-risk levels thus higher returns
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Capital Structure Decision Relevance
proposed capital structures can be used to estimate the value of the firm thus determine the shareholder’s value
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Debt-to-equity ratio
Debt ratio is given by:
Debt-to-equity ratio = Total liabilities/total equity
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Shareholders’ Care about Maximizing the Firms’ Value
The main goal of any business organization is to maximize the shareholders’ value and not to cater for equity maximization
that stockholders need to see the worth of their investments and that their value should be maximized to earn them higher returns
managers has the mandate to select a capital structure that maximizes the firm’s value
this study indicates that shareholders should concentrate more on maximizing firm’s value instead of the strategies to maximize the equity value
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Key Drivers for Increasing Value of CPK and Effect on Shareholders and Creditors
CPK can increase its value through acquisition of debt and financial performance
Financial performance is another way of improving the value of CPK as it will major on the shareholders’ objectives, which is value maximization
shareholders will be reduced and at the same time, the creditors will be increased
9
How debt add value to CPK
debt is taxed equity, there are specific tax benefits to debt financing
ROE will be referred to as the proportion of debt increases, the proportion of equity deducted net income will decrease by a smaller amount because of the benefits of the debt financing at the formula of ROE: ROE= Net Income/ Shareholders equity
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