Final answer:
Financial capital refers to funds used by a company, and profits are the financial gains earned by the company. Borrowing, bonds, and stocks are different sources of financial capital available to firms. Firms choose between sources of financial capital based on factors such as cost, risk, control, and market conditions.
Step-by-step explanation:
Financial capital refers to the funds or money that a company uses to finance its operations and investments. It is the money that is required to start, operate, and expand a business. Profits are the financial gains that a company earns from its business activities. Financial capital and profits are closely related because profits are a result of effectively allocating and utilizing financial capital.
Borrowing is the process of obtaining money from lenders, such as banks or other financial institutions. Companies may borrow funds to finance their operations or investments, and they repay the borrowed amount along with interest. Bonds are debt securities that companies issue to raise capital. Investors purchase bonds and receive periodic interest payments until the maturity date, when the principal amount is repaid. Corporate stock, also known as equity or shares, represents ownership in a company. Companies issue stock to raise capital, and investors who purchase stock become shareholders in the company.
Firms choose between sources of financial capital based on various factors such as cost, risk, control, and market conditions. For example, borrowing may be preferred when interest rates are low, and the company wants to retain full control. On the other hand, issuing stock may be chosen when the company wants to share the risk with a larger group of investors and raise significant capital for expansion.