Which of the following statements best describes debt?
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.

Question

Quizplus · Accepted Answer

This statement provides an accurate description of the challenges involved in making a refunding decision, specifically that the decision requires forecasting future interest rates. The other statements are either incomplete or inaccurate. A) is not always true, as the correct discount rate depends on the specific circumstances of the refunding. B) is an incomplete description of refunding benefits, as it does not mention potential interest savings. D) is not accurate, as delaying refunding can result in the loss of potential interest savings if rates rise too much.

Which of the Following Statements Best Describes Debt