Which of the following captures the main factor to consider when refinancing a loan at a lower interest rate?

• A. The number of shareholders in the company
• B. The original maturity date of the loan
• C. The current balance in the company's cash account
• D. The total cost of refinancing, including fees and penalties

Answer: (D)

Verified step by step guidance

1. Understand the concept of refinancing: Refinancing a loan involves replacing an existing loan with a new one, typically to take advantage of a lower interest rate. However, it is important to evaluate the total cost of refinancing, which includes fees, penalties, and other associated costs.
2. Identify the key factor: The main factor to consider when refinancing is not just the lower interest rate but the total cost of refinancing. This includes prepayment penalties for the old loan, origination fees for the new loan, and any other administrative costs.
3. Analyze the financial impact: Calculate the savings from the lower interest rate over the remaining term of the loan. Compare these savings to the total refinancing costs to determine if refinancing is financially beneficial.
4. Consider the loan's original maturity date: While the maturity date is not the main factor, it can influence the decision. For example, refinancing may be less beneficial if the loan is close to its maturity date, as the interest savings may not outweigh the refinancing costs.
5. Evaluate the company's financial position: Although the current balance in the company's cash account is not the main factor, it is important to ensure the company has sufficient liquidity to cover refinancing costs without jeopardizing its financial stability.