7. Two firms manufacture furniture. The two companies are similar in terms of the amount of revenue generated as well as their typical profit margins. Firm 1 has invested in a state-of-the-art manufacturing facility that requires very little labor, while Firm 2 employs a large staff who hand-craft each piece of furniture.

a. Which of these companies most likely has higher operating leverage? Please state the justification for your answer. (4 points)

b. Which of these companies is likely to have a lower required rate of return on its equity? Please state the justification for your answer. (4 points)