Write a 200- to 300-word paper comparing long- and short-term financing. Describe situations in which each type of financing would be used
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Jean will receive $8,500 per year for the next 15 years from her trust. If a 7% interest rate is applied, what is the current value of the future payments? Describe how you solved this problem, including which table (for example, present value and future value) was used and why.
To write a 200- to 300-word paper comparing long- and short-term financing, you should follow these steps:
1. Research and gather information: Begin by researching the concepts of long- and short-term financing. Understand their definitions, purposes, and key characteristics. This can be done by referring to reputable sources such as financial textbooks, academic journals, or reliable websites.
2. Understand long-term financing: Long-term financing refers to borrowing funds for a longer duration, usually exceeding one year. It is commonly used to finance tangible assets like buildings, equipment, or major projects. Some examples of long-term financing instruments are long-term loans, bonds, and equity financing. Long-term financing provides stability and sustainable funding for business expansion or capital-intensive ventures. It typically carries lower interest rates and longer repayment terms.
3. Understand short-term financing: Short-term financing, on the other hand, refers to borrowing funds for a shorter duration, commonly one year or less. This type of financing is often used to address short-term operational needs such as inventory procurement, payroll, or working capital. Short-term financing options include trade credit, accounts receivable financing, and lines of credit. Short-term financing carries higher interest rates and requires prompt repayment.
4. Compare long- and short-term financing: Highlight the key differences between long-term and short-term financing. Discuss factors such as duration, purpose, interest rates, repayment terms, and impact on the company's financial health. Analyze the advantages and disadvantages of each type of financing, such as the flexibility of short-term financing versus the stability of long-term financing.
5. Describe situations for each type of financing: Provide examples of situations where long-term financing would be advantageous, such as when purchasing expensive machinery, acquiring a new property, or funding large-scale research and development projects. Additionally, explain situations where short-term financing would be more suitable, such as managing seasonal fluctuations in cash flow, covering unexpected expenses, or fulfilling immediate working capital needs.
6. Wrap up with a conclusion: Summarize the differences between long- and short-term financing and reiterate the situations in which each type is commonly used. State that understanding these financing options is crucial for businesses to make informed decisions regarding their capital structure and financial planning.
By following these steps, you can write a comprehensive paper comparing long- and short-term financing while providing concrete examples of situations in which each type would be used. Remember to maintain a clear structure, support your points with evidence, and use proper citations when referencing external sources.