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:

Imputed Interest

The interest rate that is considered or assumed in the calculation of the cost of a decision, not explicitly paid.

Residual Income

The amount of income that an individual has after all personal debts and expenses have been paid from his or her earnings.

Return On Investment

A financial metric used to evaluate the efficiency of an investment, calculated as net profit divided by the initial cost of investment.

Return On Investment

A financial metric used to evaluate the efficiency or profitability of an investment, calculated as net profit divided by the cost of investment.