The conservative policy of financing is quite different from the aggressive strategy and does not take into account the temporary or seasonal requirements of funds but is based on the maximum level of total funds required in a year and funds are acquired equal to this level on a long term basis at the long term rate.
The long term rate of financing for Wave Satellite is 13 percent and Table 1 indicates that the highest level of total funds required in a specific month throughout the year is $750,000 which is required in the month of September. The firm will acquire funds equal to an amount of $750,000 through long term financing and the total cost of financing under the conservative approach can be calculated by using the following formula.
Total cost = (Maximum requirement in a month X long term rate)
Total cost = (750,000 X 13%)
Total Financing cost = $97,500
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