Participation Questions week 4 - Essay Example

Investing in rapidly growing companies or building portfolios that assume a fairly high amount of risk are some components of aggressive finance strategies. What is difference between the aggressive and conservative financing model? Conservative funding strategy focuses on funding both its seasonal and permanent requirements with long-term debt. This type of financing model focuses on minimizing risk and preserving capital. Aggressive financing will focus on placing a higher number of assets in equities instead of safer debt securities*.

Under what circumstances would you use either one? Selecting the conservative strategy will not lead to an increase in value, but it might guard against inflation. However, some funds may use an aggressive strategy then switch to a conservative later on in time. (529 plans is an example**) Therefore, depending on the overall objective, aggressive financing will allow investors to achieve maximum return sooner than the conservative strategy. I agree with you but do companies make use of short term debt only to meet seasonal requirements?

I would say that it is equally applicable to all other forms of short term finance needs. The major benefit a company can expect from aggressive financing is relatively higher return as compared to long term debt. This is because short term debt is cheaper (debt servicing cost is low) than long term debt. However, it is associated with higher risk. I agree that Conservatory financing is used to finance both long term and short term requirements with long term debt. But there will still be some portion of working capital requirements that has to be met using short term financing.

But yes, as you said, it is much safer and consists of relatively lower risk than the aggressive financing. According to the text, an Aggressive financing strategy is a strategy under which the firm funds its seasonal requirements with short-term debt and its permanent requirements with long-term debt. A