On the Structure and Valuation of Debt Refundings

Abstract

* In a recent article, Robert S. Harris examined the valuation of the refunding of discounted debt [2]. His comparison of the adjusted present value (APV) and the adjusted discount rate (ADR) methods reveals that they can lead to conflicting conclusions on the profitability of a refund. As Harris's analysis is similar to that of Laber for the refunding of highcoupon debt, my observations also apply to [5]. To illustrate the possible discrepancy between the APV and ADR approaches Harris re-examines an actual case (Grumman Corporation) considered in [4], where, based upon the ADR method, I concluded that, in the absence of tax on the gain, the transaction was profitable. According to Harris, under the same assumption the APV method would value the transaction as unprofitable. Harris's APV analysis is based upon an explicitly structured new (i.e., refunding) issue. In contrast, in [4] the new issue is nowhere specified. In fact, it is