(9–3) How would each of the factors in the following table affect a firm’s cost of debt, rd(1 − T); its cost of equity, rs; and its weighted average cost of capital, WACC?

Indicate by a plus (+), a minus (−), or a zero (0) if the factor would raise, lower, or have an indeterminate effect on the item in question. Assume that all other factors are held constant. Be prepared to justify your answer, but recognize that several of the parts probably have no single correct answer; these questions are designed to stimulate thought and discussion.

EFFECT ON:

r d(1 − T) rs WACC

a. The corporate tax rate is lowered.

b. The Federal Reserve tightens credit.

c. The firm uses more debt.

d. The firm doubles the amount of capital it raises during the year.

e. The firm expands into a risky new area.

f. Investors become more risk averse.