1. Suppose that the cost of debt is less than the cost of equity

(ignoring taxes). What happens to the cost of capital if we add

leverage (i.e. use more debt and less equity)?

(a) up (b) down (c) no change (d) indeterminate

2. What happens to the cost of debt when leveraging increases?

(a) up (b) down (c) no change (d) indeterminate

3. What happens to the cost of equity when leveraging increases?

(a) up (b) down (c) no change (d) indeterminate