Use the model in File C14 to work this problem.

a. Rework Problem 14-13, assuming that the old long-term debt will not remain outstanding, but rather must be refinanced at the new long-term interest rate of 12 percent. What effect does this change have on the decision to refinance?

b. What would be the effect on the refinancing decision if the rate on long-term debt fell to 5 percent or rose to 20 percent, assuming that all long-term debt must be refinanced?

c. Which financing method would you recommend if the stock price (1) rose to $105 or (2) fell to $30? (Assume that all debt will have an interest rate of12 percent.)

d. With P0 = $60 and rd = 12%, change the sales probability distribution to the following:

What are the implications of thesechanges?

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Alternative1 Alternative 2 Sales $2,250 2,700 3,150 Probability 0.0 1.0 0.0 Probability 0.3 0.4 0.3 Sales 2,700 7,500