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:

Interest Expense

The cost incurred by an entity for borrowed funds, reflectively the interest payments due on any type of debt.

Face Value

The nominal value printed on a bill, bond, ticket, or other document, representing its value at issuance and/or redemption.

Effective-Interest Method

A method used in finance to systematically allocate the interest expense or income over the life of a financial asset or liability.

Interest Period

The span of time over which interest is calculated and charged on loans or investments.