1. Suppose a firm is considering a business expansion plan, which requires some initial capital investment. This plan could be implemented in county A and county B.

Assume the two countries are identical so the sales, cost, and risk associated with the project are the same, except their tax rules.

In county A, capital expenditures must be depreciated over the life of the project. In country B, the capital expenditures could be expensed immediately.

If you are the financial manager, which county will you choose, A or B? Explain the reason.

2. We learned that WACC is the weighted average of cost of debt and cost of equity. Weights of debt and equity should be based on market value, not book value. If you make a mistake and use the book value, will you overestimate or underestimate WACC? Explain.