Final answer:
It is both beneficial and risky for a firm to rely on long-term borrowing. While it allows the firm to maintain operational control, it also commits it to fixed interest payments. The decision should be based on the firm's size and financial goals.
Step-by-step explanation:
Whether it is beneficial for a firm to rely heavily on long-term borrowing depends on various factors, including the firm's financial stability and strategic plans. Borrowing money from a bank or issuing bonds obligates the firm to make scheduled interest payments regardless of its income, which can be a significant disadvantage, especially if the firm faces unforeseen income fluctuations. However, the major advantage of using debt over equity (issuing stock) is that the firm retains control over its operations without being accountable to shareholders. When deciding on financing options, firms must weigh the benefits of maintaining control against the potential burden of debt obligations.
For smaller firms, bank borrowing might be more appropriate, as the relationship with the bank can be more personalized and attentive to the firm's unique situation. On the other hand, large, well-established firms are more likely to issue bonds to raise capital for significant investments or acquisitions. This illustrates that the strategy a firm should adopt in terms of borrowing largely depends on its size, recognition, and financial requirements.