A financial manager is considering two possible sources of funds necessary to finance a $10,000,000 investment that will yield $1,500,000 before interest and taxes. Alternative one is a short-term commercial bank loan with an interest rate of 8 percent for one year. The alternative is a five-year term loan with an interest rate of 10 percent. The firm's income tax rate is 30 percent. What are the crucial considerations when selecting between short- and long-term sources of finance?
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What are the crucial considerations when selecting between short- and long-term sources of finance?
Current liabilities are the short-term debt of a company that is anticipated to be redeemed within a year. The liability is listed as part of the firm's balance sheet's total liabilities. Although long-term debt is more than one year's maturity.
Two viewpoints will look at long-term debt: issuer reporting of the financial statement and financial investment. The long-term debt issuance and all its related payment obligations must be reported in its financial statements in the reporting of financial statements. Investing in long-term debt, on the other hand, involves placing capital in debt assets over one year of maturity.
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