Final answer:
A fast-growing firm creates value when its return on invested capital exceeds the cost of capital, indicating efficient use of financial resources. Firms grow through reinvestment powered by positive cash flow and may raise funds via issuing stock or with venture capital, especially if they are not yet profitable.
Step-by-step explanation:
A fast-growing firm will create value when its return on invested capital is greater than the cost of capital. This condition is critical because it reflects the firm's ability to generate returns that exceed the expenses associated with the capital it uses to finance its growth. A positive difference between return on invested capital and cost of capital indicates the firm is using its capital efficiently to grow in value.
Firms can grow by reinvesting a portion of their profits into the business, which may involve expansion through purchasing new technology or hiring labor. However, for reinvestment to successfully contribute to growth, the cash flow must be positive, which means the inflow of cash must be greater than the outflow over time.
A decision to raise financial capital depends on several factors, including the firm's stage of development, and whether it's generating profits. Newer firms or those not yet profitable may find it more challenging to pay a rate of return to financial investors but can consider raising funds through issuing stock or attracting venture capitalists, who can offer not only capital but also expertise and oversight.