Which Statement Regarding Debt Refunding Is True

question 44

Multiple Choice

Which statement regarding debt refunding is true?

• 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.

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Definitions:

American President

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