Indicate whether each of the following would increase or decrease the cost of capital that should be used by the firm in investment project evaluation. Explain.
A. Interest rates rise because the Federal Reserve System tightens the money supply.
B. The stock market suffers a sharp decline, as does the company’s stock price, without (in management’s opinion) any decline in the company’s earnings potential.
C. The company’s home state eliminates the corporate income tax in an effort to keep or attract valued employers.
D. In an effort to reduce the federal deficit, Congress raises corporate income tax rates.
E. A merger with a leading competitor increases the company’s stock price substantially.