Can anyone explain in simple terms what they mean by these and give examples with L-T and S-T financing, conservative etc?

thanks

B

thanks, I see you take your exam soon? What review materials are you using?

thanks again

here are my thoughts:

For a borrower, long-term financing is more conservative than short-term financing because there is much less chance of insolvency (i.e., inability to pay debts as they become due).  A short-term debt will come due soon, so there is risk that you won't be able to pay it or refinance, and interest rates might fluctuate (you did not lock in a rate with a long-term loan).  It is more conservative to finance permanent current assets with long-term debt.

For a lender, long-term financing is more risky: interest rate risk, credit risk, liquidity risk, ...

For the company (borrower/issuer of securities), it is more conservative to finance with equity versus debt because debt interest and principal payments are a legal obligation, but you do not have an obligation to pay dividends.

For investors, equity is more risky than debt (that's why cost of equity is higher than cost of debt, because most investors are risk averse and therefore require a higher return to compensate for the additional risk)

risk averse - investor does not like risk, so as risk goes up, investor requires higher return to compensate for the risk.  certainty equivalent < expected return on investment.
risk indifferent - investor does not care about risk, so no matter what the risk, the investor is indifferent as long as the expected return on the investment is the same.  certainty equivalent = expected return on investment.
risk seeking - investor likes risk, so he requires a lower return on a risky investment than he would on a risk-free investment.  certainty equivalent > expected return.

certainty equivalent is the rate of return of a risk-free investment that investor would need to receive in order to be indifferent to that versus an investment with risk.