How would each of the following affect a firms cost of debt, rd(1 T); its cost of equity, rs; and its 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 for each answer that other things are held constant, even though in some instances this would probably not be true. Be prepared to justify your answer, but recognize that several of the parts have no single correct answer; these questions are designed to stimulate thought and discussion.

EFFECT ON

rd(1 T) rs WACC

a. The corporate tax rate is lowered. ______ ______ ______

b. The Federal Reserve tightens credit. _____ ______ ______

c. The firm uses more debt; that is, it

increases its debt/assets ratio. ______ ______ ______

d. The dividend payout ratio is increased. ______ ______ ______

e. The firm doubles the amount of

capital it raises during the year. ______ ______ ______

f. The firm expands into a risky new area. ______ ______ ______

g. The firm merges with another firm

whose earnings are countercyclical

both to those of the first firm and to

the stock market. ______ ______ ______

h. The stock market falls drastically, and

the firms stock price falls along with

the rest. ______ ______ ______

i. Investors become more risk averse. ______ ______ ______

j. The firm is an electric utility with a

large investment in nuclear plants.

Several states are considering a ban on

nuclear power generation. ______ ______ ______