Assume you have just been hired as a business maneger of PizzaPalace, a regional pizza restaurant chain. The company's EBIT was $$120$ milion last year and is not expected to grow. PizzaPalace is in the $25\%$ state$-$plus$-$federal tax bracket, the risk$-$free rate is $6$ percent, and the market risk premium is $6$ percent. The firm is currently financed with all equity, and it has $10$ milion shares outstanding.

When you took your corporate finance course, your instructor stated that most firms' owners. would be financially betler ofr if the firms used some debt. When you sugpested this to your new boss, he encouraged you to pursue the idea. if the company were to recapitalize, then debt would be issued, and the funds received would be used to repurchase stock. As a first step, assume that you obtained from the firm's investment banker the following estimated costs of debt for the firm at of erent capital structures:

$\backslash$table$[[$Percent Financed with Debt, wd$,$Nd$],[0\%,-],[20,8\mathrm{.}05],[30,8\mathrm{.}5],[40,10\mathrm{.}0],[50,12\mathrm{.}0]]$

A$.$ Using the free cash flow valuation model, show the only avenues by which capital structure can affect value.

$(1)$ What is business risk? What factors infuence a frm$\text{'}$s business risk?

$(2)$ What is operating leverage, and how does in affect a firm's business risk? Show the operating break$-$even point if a company has fixed cost of $$200,$ a sales price of $$15,$ and variable costs of $$10.$

C$.$ Explain the difference between financial risk, and business risk.