Which of the Following Statements Is Most CORRECT

question 24

Multiple Choice

Which of the following statements is most CORRECT?

• A) The key benefits associated with refunding debt are the reduction in the firm's debt ratio and the creation of more reserve borrowing capacity.
• B) The mechanics of finding the NPV of a refunding decision are fairly straightforward.However, the decision of when to refund is not always clear because it requires a forecast of future interest rates.
• C) If a firm with a positive NPV refunding project delays refunding and interest rates rise, the firm can still obtain the entire NPV by locking in a low coupon rate when the rates are low, even though it actually refunds the debt after rates have risen.
• D) Suppose a firm is considering refunding and interest rates rise during time when the analysis is being done.The rise in rates would tend to lower the expected price of the new bonds, which would make them cheaper to the firm and thus increase the expected interest savings.
• E) If new debt is used to refund old debt, the correct discount rate to use in the refunding analysis is the before-tax cost of new debt.

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Definitions:

Put-Call Parity

A fundamental principle in options pricing that establishes a specific relationship between the prices of European put and call options with the same strike price and expiration date.

European Put Option

A financial contract that gives the holder the right, but not the obligation, to sell an underlying asset at a specified price on the expiration date.

Exercise Price

The price at which the holder of an option can buy (for a call option) or sell (for a put option) the underlying security.

Currency-Translated Options

Options that involve the right to buy or sell a specified amount of one currency for another at a predetermined exchange rate during a specified period.