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.

---

Definitions:

Predicting Profits

The process of estimating the future financial profits of a business based on current data, trends, and analysis.

Production Volumes

The quantity of goods a company produces within a given period, often used to measure operational efficiency.

High-low Method

An accounting technique used to estimate the variable and fixed components of a company's costs, based on the highest and lowest levels of activity.

Fixed Costs

Expenses that do not change in total regardless of the level of production or sales activity.