Discuss the main factors which a company should consider when determining the appropriate mix of long-term and short-term debt in its capital structure.

CPA-Financial-Management-Section-3 Revision kit

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The traditional view is that fixed assets should be financed term sources of finance and current assets a mixture of long-term and short-term sources

(ii) Cost –he company may find it easier to raise short term finance with low security than long term finance

(iii) Security –The company may find it easier to raise short term finance with low security than long term finance

(iv) Risk –In opting for short-term debt, the company faces the risk that it may not be able to renegotiate the loan on such good terms. Long term loans are thus less risky

(v) Flexibility –Short term debt is more flexible since it allows the firm to react to interest rate charges and avoid being locked into an expensive long term fixed rule commitment when rates are falling.

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