This report provides an analysis and evaluation into M&M Pizza, and the financial impacts on dividends, WACC and debt and equity claims through the change in capital structure; from an unlevered firm to a levered firm. We will also explore these effects if a new tax law were to be implemented. The second part of this report analyzes the operating industry M&M Pizza would fall under, and the characteristics of the restaurant industry as a whole. We further analyze the operating strategy of M&M Pizza, contrasting it with a similar company Pizza Pizza Royalty
Corporation “PPRC”, and analyze the operating and business risks of this industry. We conclude this report with an examination of the PPRC ownership structure, discuss potential implications, and calculate the capital structure of PPRC and contrast the financial risks with M&M in its levered form, concluding with a comment on the viability of M&M’s proposed capital structure.
In our report, we found that issuing debt has a positive impact on the firm’s value only if the scenario includes corporate taxes as well as interest tax shields. Without corporate taxes, there is no additional benefit for a firm to change their capital structure because capital structure by itself does not create additional value. Additionally, we see that WACC decreases and share prices increase in a levered firm when there is an interest tax shield. Finally, dividends always increase when we added leverage to the firm; however, this always happens to compensate the additional risk of equity investors in a levered firm.
Remaining competitive in the Canadian restaurant industry will be a challenge. Despite the continued growth, the industry faces immense competition from companies of all sizes, the constant need to adapt to emerging trends and consumer preferences and low overall profitability and focus on cost minimization. Currently, the restaurant industry in Canada is dominated by the likes of Pizza Pizza, McDonalds, Yum! Brands and Cara Operations . M&M’s operating strategy is similar to Pizza Pizza Ltd’s “PPL”, where is produces and sells its own pizzas.
Contrasted with Pizza Pizza Royalty Corporation “PPRC”, they do not operate the day-to-day
1|P a ge
operations but simply manage the royalties from its Pizza Pizza stores, thus will utilize a completely different set of assets than PPL and M&M Pizza in its operations.
The industry overall faces a variety of business and operating risks. The restaurant industry is particularly vulnerable, as mentioned above, to competition and changing consumer behaviour, as companies seek to differentiate themselves from the competition using a variety of methods such as pricing models and product offerings, Changing labour costs, being a high input cost for the restaurant industry as a whole, is another risk. One critical business risk is the changing economic factors, especially disposable income and commodity prices, which can affect consumer behaviour and decrease levels of profitability. M&M Pizza should pay attention to its current assets and liabilities, revenues, cost of goods sold, overall debt and wage expenses to assess the level of risk of the companies operating in this industry. Additionally, special attention should be paid to the ownership structure within the firms, as losing control over critical company decisions and policies could negatively impact growth in the future. We have concluded that M&M would
2|P a ge
Impact of Plan on Financial Statements, Dividends
As seen in , the fundamental business, assets, and cash flows generated from the business activities remains the same. This is expected, given that there is no change in assets, the sole differentiator is the replacement of share capital with debt; that is to say, the only difference is in regard to how the company’s assets are financed. Correspondingly, the distributions from to the company to its financiers will…