The appropriate discount rate to use when analyzing a refunding decision is the after-tax cost of new debt, in part because there is relatively little risk of not realizing the interest savings.

Question

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The after-tax cost of new debt is appropriate for analyzing a refunding decision because the primary benefit of a refunding is interest savings. The after-tax cost of new debt accounts for the tax advantages of debt financing, and there is relatively little risk in realizing the interest savings compared to other investment or financing decisions.

The Appropriate Discount Rate to Use When Analyzing a Refunding