The restaurant industry is sub-divided into a full service and limited service sectors. However, the full service sector include fine and casual dining while the limited service sector is sub-divided into fast and casual food sub-sectors. Some of the dominant players in the restaurant industry are MacDonald’s, California Pizza Kitchen (CPK), Wendy’s, Applebee’s, Friendly’s, Chili’s and many others. Although, the industry faces a number of challenges such as the rising cost of labor and commodity prices, deteriorating demand, increased interest from activist shareholders and decreasing income of shareholders it continues to exhibit growth. Technomic Information Services, a restaurant industry consultant firm, projected in 2007 the five year compound annual growth rate (CAGR) to continue at 5.5% and 5.1% for limited service and full service sectors respectively.
California Pizza kitchen was founded in 1985 by Rick Rosenfield and Larry Flax. As of 2007, the company had 213 subsidiaries in 28 states and 6 countries of these 170 were fully owned by CPK. The core source of revenue for expansion is through franchising, partnerships and divesting. CPK has remained relevant to its customers through excellent ingredients in its products such as the Shanghai Garlic Noodles, incredible offers and family friendly environments. The restaurant also offers a wide product range of pastas, pizzas and appetizers to its customers. The growth potential of the business is exhibited by continued positive growth projections of analysts. They place the potential of CPK owning full service units at 500. The company has units in countries such as china, Indonesia, japan, Malaysia and Philippines the firm had plans of opening more units in South Korea and Mexico.
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In the second quarter of 2007, the company was about to post record profits despite industry setbacks. The sales were up 5% with growth in revenue in line with the analyst’s projections. Five year compound growth rate projection for CPK was 6.5% above the industry average at 5.1%. The results were better than industry peers, although, the share price of the company had fallen 10% in June 2007 to $22.10. To stabilise the share price, the management of the company opted for a repurchasing program. However, debt obligations were necessary for successful implementation of the program. Rick Rosenfield, the company chief executive, favoured alternative options to maintain staying power vital to long-term survival.
California Pizza Kitchen’s weighted average cost of capital is calculated by taking into consideration the proportionate weights of each capital in the balance sheet. It is the minimum return on assets a business must yield in order to satisfy stakeholders. WACC gives the average of cost of the sources of financing such as debt and equity.