Final answer:
Financial capital is essential for firms to fund their operations and expansions. Firms can acquire it through borrowing (loans or bonds) or issuing corporate stock, each with its pros and cons. Choice of funding depends on cost of capital, control concerns, and growth aims.
Step-by-step explanation:
Financial capital is the money firms use for starting up, maintaining, or expanding their operations, and it is closely related to profits. A firm that has adequate financial capital can invest in new projects, which can increase its potential for generating profits. However, acquiring financial capital often involves choices between different sources of funding.
The process of borrowing, through bank loans or issuing bonds, requires a firm to commit to regular interest payments, irrespective of its financial income at any time. This can be a significant burden if the firm does not have enough income to meet these payments. On the other hand, borrowing allows the firm to maintain full control since it does not need to answer to shareholders.
Issuing corporate stock involves selling portions of company ownership to public investors and typically results in a firm coming under the scrutiny of a board of directors and its shareholders. The trade-off here is that while a firm can raise substantial funds without the immediate burden of repayments, it does cede some level of control and future claims on profits.
When choosing between sources of capital, a firm must consider factors such as the cost of capital, control over the business, and the potential for growth. The option chosen will likely depend on the current market conditions, the firm's financial health, and its growth strategies.