A conservative financing plan involves

A. heavy reliance on debt
B. heavy reliance on equity
C. high degree of financial leverage
D. high degree of combined leverage

This question is making my brain hurt, it seems straight foward, but I am still rather inexperienced with basic finance. I have looked through my text book and slides. I understand how the weight of debt + weight of perferred stock + weighted equity = WACC, but I cannot link this with conservative finance planning. I found a definition for financial leverage in my text book, so I am inclided to answer C. I don't have any more evidence to support my answer. HELP PLEASE....

A - Is it conservative to borrow a lot?

B - Is it conservative to owe the lenders little and risk only money you have?

C Is it risky to buy assets with a small percentage of your own money and mostly borrowed money which you owe even if the asset drops in value ? (see housing mortgage crisis)

D. same

thank you for expanding the answers with words that I better understand

o.k.

A - is not conservative it is aggressive in my opnion

B - is more conservative than A, but risky, I might end up living under a bridge and robbing liquor stores.

C - is always risky (not conservative)

D - Same as above

(B) is my answer (heavy reliance on equity)

agree

Yes, the other approaches could lead to broken knee caps if you borrowed from the wrong institution.

No problem, I'll be happy to help you with this question!

A conservative financing plan typically involves minimizing risk and maintaining stability. Let's go through the options and see which one aligns with conservative financing.

A. Heavy reliance on debt: This option implies taking on a significant amount of debt. It is not usually considered conservative, as excessive debt can increase financial risk.

B. Heavy reliance on equity: This option suggests relying heavily on raising funds through issuing equity. It is generally considered more conservative than heavy debt reliance since equity does not need to be repaid like debt does.

C. High degree of financial leverage: Financial leverage refers to the use of debt to finance investments and operations. While it can increase potential returns, it also magnifies risks. So, choosing this option would not be considered conservative.

D. High degree of combined leverage: Combined leverage refers to the combined effect of operating leverage (fixed costs) and financial leverage (debt). While related to financial risk, it is not specifically associated with conservative financing.

From the given options, the answer that aligns with a conservative financing plan is B. Heavy reliance on equity. This approach aims to reduce financial risk by avoiding excessive debt and maintaining stability through equity financing.

I hope this explanation helps you understand the concept of conservative financing and why the answer is B. If you have any more questions, feel free to ask!