Certified Financial Management Specialist Practice Exam

A company with a conservative capital structure is likely to?

1. Seek rapid growth through high debts

2. Use more equity than debt to finance its assets

3. Prioritize aggressive market expansion

4. Know negligible operational expenses

The correct answer is: Use more equity than debt to finance its assets

A company with a conservative capital structure typically emphasizes financial stability and risk minimization. This type of company would often prioritize using more equity than debt for financing its assets. The rationale behind this approach is that equity financing does not create mandatory repayment schedules like debt financing does. By relying more on equity, the company can maintain greater financial flexibility, reducing the risk of default during economic downturns or financial stress. Additionally, a conservative capital structure reflects a cautious approach to growth and investment strategies. It indicates that the company may choose to avoid high levels of leverage, which can amplify risks and lead to significant financial strain, especially in volatile market conditions. Therefore, the choice to lean towards equity aligns with the philosophy of maintaining a stable and secure balance sheet, focusing on long-term sustainability rather than aggressive growth strategies. In contrast, seeking rapid growth through high debts would suggest a more aggressive approach, which is not characteristic of a conservative capital structure. Prioritizing aggressive market expansion would typically involve taking on more risk, and knowing negligible operational expenses does not correlate with the conservative approach that focuses on careful financial management.