Final answer:
Financing permanent working capital with long-term debt carries risks and profitability considerations. The timing of debt repayment and cash inflows must be carefully managed to avoid financial strain. However, long-term debt can also provide stability and potential profitability if the return on investment exceeds the interest rate.
Step-by-step explanation:
When permanent working capital is financed with long-term debt, there are both risks and profitability considerations to be aware of. One of the risks is the potential for a mismatch between the timing of the debt repayment and the cash inflows of the business. This can create financial strain if the business is unable to generate sufficient cash flow to meet its debt obligations.
On the other hand, financing permanent working capital with long-term debt can also have its advantages. It allows the business to have stable and predictable financing over a longer period of time, which can provide a sense of security. Additionally, if the business is able to generate a higher return on the capital invested than the interest rate on the debt, it can potentially be profitable.
Overall, the risk and profitability associated with financing permanent working capital with long-term debt depend on various factors such as the interest rate on the debt, the cash flow of the business, and the expected return on the capital invested.