I'm 99% sure you don't have to change that option to rename a folder.
To explain what that option does:
Say you have a blank windows installation. There's no Adobe Reader installed, so Windows doesn't "know" what a PDF file is, i.e. if you double-clicked it, Windows would ask how to open it.
If you look at that PDF file in Windows Explorer, it'll show up as "whatever.pdf".
Now you install Adobe Reader, and the installation tells Windows "hey there, I'm the program to open PDF files with".
So now Windows "knows" the file type PDF, and upon double-clicking, it will open the file with Adobe Reader. Thus, if the option is checked, the file will now appear as "whatever", although its name is still "whatever.pdf"
If you uncheck the option, Windows will display every file extension, regardless of whether it knows which program to open the file with.