How does a company determine how much long-term debt is needed for future capital requirements? Is there a formula?
Long-term debt refers to obligations and loans that have a maturity that is longer than one year. Capital requirement refers to the minimum amount of resources that a company requires to the expenses and the usual costs necessary for business operation (Vinturella & Erickson, 2004).
How a company determines the long-term debt needed for future capital requirements:
The key to effectively forecast future capital requirements depends on the understanding of the relationship between assets and projected sales. A firm's financing requirements come from the owner's investment such as equity capital and external financing such as debt capital (Vinturella & Erickson, 2004).
A company determines the long-term debt required by estimating the sales. Financial statements are driven by the assumptions made about the future sales. Companies must study the recent rate of growth of sales over the last few years, the market, the competitive advantage of their product, the competitive situation and sales in their product niche. Marketing ...
The solution determines long-term debt needed for future capital.