Assume you have just been hired as a business manager of PPPZ Pizza, a regional pizza restaurant chain. The companys EBIT was $50 million last year and is not expected to grow. The firm is currently financed with all equity and it has 10 million shares outstanding. When you took your corporate finance course, your instructor stated that most firms owners would be financially better off if the firms used some debt. When you suggested this to your new boss, he encouraged you to pursue the idea. As a first step, assume that you obtained from the firms investment banker the following estimated costs of debt for the firm at different capital structures: Percent Financed with debt, wd rd 0% 0.0% 20% 8.0% 30% 8.5% 40% 10.0% 50% 12.0% If the company were to recapitalize, debt would be issued, and the funds received would be used to repurchase stock. PPPZ Palace is in the 40% state-plus-federal tax bracket, the risk-free rate is 6 percent, and the market risk premium is 6 percent. What does capital structure theory attempt to do? What lessons can be learned from capital structure theory? Be sure to address the MM models. What does does the empirical evidence say about capital structure theory? What are the implications for managers? With the above points in mind, now consider the optimal capital structure for PizzaPalace.