sume the same expected interest rate in either case. Also, would a skew to the right or a skew to the left, from the same expected rate, make you more likely to recommend an immediate refunding?
A tight probability distribution would support financing now because one would assume that the interest rate would not change dramatically. A skew to the right would support the argument for immediate refunding.
5. Suppose the major bond rating agencies downgraded Shenandoah's credit rating from A to triple-B before the firm could initiate the refunding, and this caused the following changes to data given in the case:
a. The coupon rate on the new bond would be 10.25 percent.
b. The flotation cost on the new bonds would be 1.5 percent of the issue's face value, or $1,125,000.
c. How would these factors affect the refunding decision?
The changes wound encourage a decision to refund now.
6. If the yield curve had been downward sloping, and if Lange felt that "the market knows more than I do" about the future course of interest rates, how might this affect his decision to recommend immediate refunding versus deferring the refunding?
It would encourage him to support immediate refunding.
7. How would Shenandoah's position as a regulated public utility affect the accept/reject decision on the bond refunding? Would Shenandoah have more or less incentive to refund than an unregulated company? (Note: In theory, regulators are supposed to set rates that permit utilities under normal conditions to exactly earn their costs of capital, in which case all projects, including bond refundings, would have zero NPVs. However, changes in the industry have led to intense competition among energy providers, not so much for residential users but for industrial and commercial users, who account for over half the power sold by most utilities. This competition has made it difficult for many utilities to earn their costs of capital.)
Becaus...