Q.Q.

ABC Company is trying to decide whether to lease or buy some new equipment for its tool and die operations. The equipment costs $1.2 million has a 7-year life, and will be worthless after the 7 years. The after-tax cost of borrowed funds is 8 percent and the tax rate is 35 percent. The equipment can be leased for $242,500 a year. What is the net advantage to leasing?

XYZ Company has expected earnings before interest and taxes of $7,200. Its unlevered cost of capital is 14 percent and its tax rate is 35 percent. The firm has debt with both a book and a face value of $2,800. This debt has an 8.5 percent coupon and pays interest annually. What is the firm's weighted average cost of capital?