Question

iscuss the major factors that should be taken into account when deciding on the appropriate mix of long term and short term borrowing necessary to finance the expansion program

Answer 1

major factors that should be taken into account when deciding on the appropriate mix of long term and short term borrowing necessary to finance the expansion program:-

1. Nature of asset

If the assets is of non current nature like plant and machinery then long term finance is more appropriate as it will paid over a longer period of time. On the other hand if we are obtaining an assets in current nature which can be realised easily like investment in stock etc then short term finance is preferred.

2. Interest rate

If the firm expect future interest rates to be lower than long term finance can be opted as it will result in lower interest costs and vice versa

3. Early payment

Short term financing can be more beneficial as they often come with no additional penalty for early payment which is not with some sources of long-term finance.

4. Refunding risk

Short term finance are being reviewed more quickly than long term source and can lead to refunding risk . As a result long term finance is more desirable.