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

1 Which of these companies most likely has higher operating leverage? Please state the justification for your answer.

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