CFA Practice Question

CFA Practice Question

In what situation would a company not refinance or retire their debt prior to the original maturity?
A. Declining interest rates
B. Acquisition of assets
C. Sale of additional equity
Explanation: The sale (not acquisition) of assets will generate funds that the firm may reduce debt with.

User Contributed Comments 7

User Comment
Sator what if company buy some asset with cash now and repay debt with other cash reserves? what if acquisition of assets occurs a t0 and original maturity of debt is at t0+ n, where n is big enough to make the previous acquisition irrelevant?
I think the right answer here is C (I really can't imagine how a company would use capital increases proceedings with an higher cost than debt to refinance debt causing wacc to increase and value to be depressed)
kathlee When a company acquires new assets through financing - do they get their loans refinanced to achieve better terms? (i.e. When you refinance your house if you buy an investment property etc.?)
Kuki how do falling interest rates allow companies to retire debt? if interest rates prices increase right?
or is it because they have more cash available due to the lower payments they have to make?
charliedba they now retire bonds with high interest and issue new bonds with low interest (since the interest level is low).
dlukas Yikes Kuki, I hope you plan on reading about fixed income before the exam.

See: callable vs. refundable bonds.

Good luck my friend.
indrayudha Sator, the company may have unfavorable debt-equity ratio which necessitate issuing equity to repay debt. While may not be favorable cost-wise, it's beneficial for stronger balance sheet.
Ifi2703 Also, i assumed that if they issued more equity (and assuming debt stays the same or some of it is retired), the debt/equity ratio starts to decrease i.e. becomes more attractive.

So, in that situation as well as if rates are falling, there is an incentive to retire debt or refinance it.
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