The document discusses business risk versus financial risk and how operating leverage and capital structure impact risk. It provides examples to illustrate: 1) Business risk depends on the uncertainty of a firm's operating income, while financial risk depends on the amount of debt financing used. 2) Operating leverage affects business risk, as high fixed costs mean small sales changes impact profits. 3) Capital structure choices impact total risk to shareholders, as debt increases financial risk despite possibly raising expected returns through tax benefits. 4) An optimal capital structure balances the tax benefits of debt against increasing bankruptcy costs from higher leverage.