Certified Financial Management Specialist Practice Exam

An aggressive capital structure typically indicates what about a company’s financing?

1. Use of only equity financing

2. A balanced mix of debt and equity

3. Higher use of debt relative to equity

4. Only self-financed projects

The correct answer is: Higher use of debt relative to equity

An aggressive capital structure is characterized by a higher use of debt relative to equity. This approach is often employed by companies aiming for rapid growth or higher returns on equity, as debt financing can amplify profits when a company is performing well. By utilizing debt, a company can leverage its equity capital to invest in more projects or expand operations. When firms operate with a capital structure dominated by debt, they have the potential for higher returns due to the fixed interest expense associated with the debt, especially when the investments yield returns greater than the cost of debt. However, this strategy carries a higher risk, as companies must ensure they can meet interest and principal repayments, particularly during downturns in performance. The other options depict less aggressive financing strategies. Using only equity financing does not typically lead to high leverage, while a balanced mix of debt and equity suggests a more conservative approach to financing. Self-financed projects imply reliance solely on internally generated funds, which would not maximize growth potential through leveraging debt. Therefore, the correct response accurately reflects the increased reliance on debt in an aggressive capital structure.