finance

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....

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  1. 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

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  2. 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)

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  3. agree

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

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