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?
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:
- 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.
- 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.
- 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:
- 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.
- 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
- 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…
