Long-Term Debt Strategy

The firm will need to raise funds immediately for the acquisition, and debt will be used. Should the firm borrow on a long-term or short-term basis? Why?

APA

Long-Term Debt Strategy

Whether a firm should borrow on a long-term or short-term basis depends on several factors related to the acquisition and the firm’s financial situation:

  1. Nature of the Acquisition:
    • Long-Term Assets: If the acquisition involves purchasing long-term assets (such as property, equipment, or another company), long-term debt may be more appropriate. This aligns the debt repayment schedule with the useful life of the acquired assets.
  2. Cost of Borrowing:
    • Interest Rates: Long-term debt typically carries higher interest rates than short-term debt due to the longer repayment period and higher risk for lenders. Firms should consider the overall cost of borrowing when making their decision.
  3. Financial Stability and Cash Flow:
    • Cash Flow Adequacy: If the firm’s cash flow is stable and sufficient to cover long-term debt payments, long-term borrowing may be feasible. Short-term borrowing, on the other hand, requires periodic refinancing and can be riskier if cash flow fluctuates…

Whether a firm should borrow on a long-term or short-term basis depends on several factors related to the acquisition and the firm’s financial situation:

  1. Nature of the Acquisition:
    • Long-Term Assets: If the acquisition involves purchasing long-term assets (such as property, equipment, or another company), long-term debt may be more appropriate. This aligns the debt repayment schedule with the useful life of the acquired assets.
  2. Cost of Borrowing:
    • Interest Rates: Long-term debt typically carries higher interest rates than short-term debt due to the longer repayment period and higher risk for lenders. Firms should consider the overall cost of borrowing when making their decision. Long-Term Debt Strategy
  3. Financial Stability and Cash Flow:
    • Cash Flow Adequacy: If the firm’s cash flow is stable and sufficient to cover long-term debt payments, long-term borrowing may be feasible. Short-term borrowing, on the other hand, requires periodic refinancing and can be riskier if cash flow fluctuates…