Final answer:
The working capital decision in the question is how much cash the firm should reserve. Borrowing allows a firm to maintain control but requires scheduled interest payments, while issuing stock dilutes ownership but doesn't require fixed repayments.
Step-by-step explanation:
The working capital decision referred to in this question is: C) How much cash should the firm keep in reserve? This is a decision related to managing the day-to-day financial operations of a company, ensuring there is enough cash flow to meet short-term expenses and obligations. It is a critical aspect of a firm's overall financial health and efficiency.
If a small but somewhat established firm requires a surge of financial capital for a major expansion, the choice between raising funds through borrowing or by issuing stock is significant. Borrowing, from banks or through bonds, has the advantage of allowing the firm to maintain control over its operations, as it is not subject to new shareholders. However, it also commits the firm to fixed interest payments. Issuing stock dilutes ownership and makes the firm accountable to its shareholders and a board of directors, but it doesn't require regular interest payments, reducing pressure on cash flow if income is uncertain.