1.) Your firm needs to borrow $500 million for four years and is choosing between a private placement or a public underwritten offering. The bonds will make annual coupon payments. The private bond investors demand a 6.75% coupon and a loan origination fee of 1.5%, while the underwriter charges a 3% spread and estimates the public bonds would require a 6.5% coupon. Which debt source provides the lower flotation-adjusted cost of borrowing?

2.) Your firm needs $15 million of new manufacturing equipment. If purchased, the equipment will be depreciated straight-line over five years, after which you estimate you could sell the equipment for $1.25 million. In this case, you are also responsible for $1 million per year of maintenance costs. If leased, the annual lease payments will be $4.2 million per year for five years (beginning of year payments). Maintenance is included with the lease, but the lease does require a $0.5 million security deposit. The security deposit will be returned at the end of the lease if the asset is returned in acceptable condition (reflecting only normal wear-and-tear). Your cost of borrowing is 7%, your marginal tax rate is 21%, and the lease qualifies as a true tax lease. What the NPV of the lease vs buy decision and should your firm lease the asset or borrow money to purchase it?