Which of the following is (are) likely to cause an increase in the after-tax cost of debt (k_d(1 - T))?

I. An increase in the level of interest rates
II. An increase in tax rates
III. A decrease in tax rates

Correct Answer: I and III

Rising interest rates translate into a higher cost of debt as investors demand higher interest payments on new debt. Lower tax rates translate into a higher cost of debt since debt interest payments are deductible and WACC considers the after-tax cost. Lower tax rates mean smaller deductions and higher after-tax cost.