Which of the Following Statements Is Most CORRECT

question 19

Multiple Choice

Which of the following statements is most CORRECT?

• A) 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.
• B) The key benefits associated with refunding debt are the reduction in the firm's debt ratio and the creation of more reserve borrowing capacity.
• C) 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.
• D) 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.
• E) 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.

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Definitions:

Level of Significance

The criterion used for rejecting the null hypothesis, representing the probability of committing a Type I error.

Expected Frequency

The forecasted count of occurrences over a given interval, often used in statistical analysis and probability.

Significance Level

The probability of rejecting the null hypothesis in a statistical test when it is actually true; commonly used thresholds include 0.05, 0.01, and 0.1.

Attitudes

A settled way of thinking or feeling about someone or something, typically reflected in a person's behavior.