Q.No. 1 Lucky Cement wants to evaluate an acquisition of an equipment worth Rs 300,000. Its marginal tax rate is 35 percent. If purchased, the depreciation of equipment will take place at straight line method. The salvage value of the equipment is assumed to be 30,000 at the end of its useful life of 10 years. If the equipment is purchased, Lucky cement will finance the asset through borrowing from bank at annual before tax cost of 10%. If equipment is leased, Lucky Cement can have the equipment at Rs 38000 pre-tax rate per year, which is to be paid at the beginning of each year. Companys weighted average after tax cost of capital is 10 percent.

1. Compute the net advantage to leasing (8 marks)
2. What alternative, leasing or owning, should be chosen? Explain (2 mark)

Q.No.2 Explain Why you agree or disagree with the following statements. The answer should not be more than 3 sentences. Be specific in your answer and write only the most relevant explanations (Total Marks 10, Each 5)

1. MM Proposition I with no tax supports the argument that a firm should borrow money to the point where the tax benefit from debt is equal to the cost of the increased probability of financial distress.
2. Leveraged beta represents fundamental operational risk.

Please Answer this two questions