Question

What is the most conservative financing strategy a firm could implement?

What makes an aggressive financing strategy tempting to a firm?

Answer 1

The most conservative financing strategy involves funding for short term current assets using long term financing options since it gives the firm a higher repayment terms. However it reduces profitability owing to higher costs of maintaining the capital.

An aggressive financing strategy involves using short term financing options not only to finance fluctuating current assets but permanent current assets as well. This helps in achieving higher shareholder value through increased profitability but poses high risk to solvency of the firm.