Final answer:
The claim that a firm’s rapid sales growth leads to more financing being internally generated is false. A firm’s capacity to finance internally is tied to profitability, not just sales growth. Financing options like bank borrowing, issuing bonds, and selling stock vary in their suitability and implications for the firm.
Step-by-step explanation:
The statement that 'The faster a firm’s growth in sales, the more likely it is that an increasing percentage of financing will be internally generated' is false. A firm’s ability to generate financing internally is primarily based on its profitability and not simply on the growth in sales. High sales growth does not necessarily translate to high levels of retained earnings that can be used for internal financing.
Firms have a couple of options when it comes to financing: borrowing from banks, issuing bonds, and selling stock. Each option carries its own set of advantages and disadvantages. For example, bank borrowing is more personalized and may fit better with smaller or medium-sized firms, whereas issuing bonds might work better for larger and well-established firms. Bank borrowing and bonds come with the obligation of regular interest payments, which can be a disadvantage if the firm’s income is inconsistent.
Issuing stock, on the other hand, does not require interest payments, but it does mean that ownership is spread among shareholders, and the firm becomes accountable to them and a board of directors. This could result in a loss of control over the firm’s operations for the original owners. Therefore, the decision on whether to increase financing from internal operations or seek external funding will depend on various factors, including the firm’s current profitability, the need for control, and the cost of capital.