Question

Why can firms not just use their own profits for financial capital, with no need for outside investors?

a. Profits are insufficient for expansion
b. Investors require a share in profits
c. Firms often do not make profits
d. Profits are often reinvested

Answer 1

Firms cannot solely rely on their own profits for financial capital due to profits being often reinvested, being insufficient for expansion, and investors requiring a share in profits.

Step-by-step explanation:

Firms cannot just use their own profits for financial capital without the need for outside investors because:

1. Profits are often reinvested: Many established companies choose to reinvest their profits in equipment, structures, and research and development. However, firms just starting out may have attractive investment opportunities but limited current profits to invest.
2. Profits are insufficient for expansion: Even large firms can experience low profits or losses. To continue making real investments during tough times, firms need a steady and reliable financial capital source other than profits.
3. Investors require a share in profits: When firms seek outside investors, those investors often expect a share in the profits in return for providing financial capital.