Long-term Debt Management Issues

Long-term debt is used to finance long-term assets and business activities that have long-term earnings potential, such as property, plant, and equipment and research and development. In issuing long-term debt, management must decide:

• whether or not to have long-term debt,
• how much long-term debt to have, and
• what type of long-term debt to have.

Among the advantages of long-term debt financing are that:

• common stockholders do not relinquish any control,
• interest on debt is tax deductible, and
• financial leverage may increase earnings.

Disadvantages of long-term financing are that:

• interest and principal must be repaid on schedule, and
• financial leverage can work against a company if a project is not successful.

• Financial Leverage