Mini case in Financial Management- Capital structure and capital budgeting techniques

Using the information from the Chapter 15 Mini case in Financial Management: Theory and Practice.
Please answer question a. & b. below, as well as a using the mini case information, write a 250-500 word recommendation of the financial decisions you propose for this company based on an analysis of its capital structure and capital budgeting techniques. Explain why you chose this recommendation. The purpose of this assignment is to analyze a firm's capital structure and its impact on firm performance. Within the assignment, explain core concepts related to business risk and recommend sound financial decisions based on analysis of a firm's capital structure and capital budgeting techniques.
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a. Using the free cash flow valuation model, show the only avenues by which capital
structure can affect value.

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

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Chapter 15 Mini Case
Assume you have just been hired as a business manager of Pizza Palace, a regional pizza
restaurant chain. The company’s EBIT was $120 million last year and is not expected to
grow. Pizza Palace 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 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. 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 different capital structures:

Percent Financed
with Debt, (wd rd)
(wd 0% = rd —)
(wd 20 = rd 8.0%)
wd 30 = rd 8.5)
(wd 40 = rd 10.0)
(wd 50 = rd 12.0)