Short Term Interest-Bearing Debt
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Please read this statement and answer the practice questions.
Smaller companies treat short-term interest-bearing debt as long-term debt and they also include it in the capital structure to estimate the overall cost of capital of the company."
1.why do you think small companies treat short term debt this way?
2. Do you think this philosophy is based on gross income, cash flow, or some other factor? I would tend to think this is more of a cash flow issue. All things being relative, a short term, interest bearing debt experienced by a small company could certainly have the same, or more significant effect, than a long term debt on a large company.
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Solution Summary
The solution explains why small companies treat short-term interest-bearing debt as long-term debt and the factor that causes it to be treated that way. References are included.
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Long-term debt refers to the permanent long-term funding of the company that is a part of the capital structure. Many companies treat short-term debt as long-term debt and include it in the capital structure. It is a long-term financing strategy that companies use to roll over the short-term borrowings. Companies save millions of dollars yearly by taking advantage of the lower interest rates of the short-term debts from instruments of the calm debt markets which offer financial flexibility. By doing such, they use the short-term borrowings to finance a portion of their permanent assets. A business may also choose a short-term debt with a floating rate instead of a fixed-rate long-term debt in order to save money. ...
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