Final answer:
A firm with excess cash might logically repurchase its own shares, signaling a belief in undervalued stock and a desire to increase shareholder value without further investment or diluting ownership. Borrowing or issuing bonds entail obligatory repayments, while issuing stock raises capital without debt but involves sharing control and meeting regulatory demands. The correct answer is option b).
Step-by-step explanation:
A firm with excess cash and few investment alternatives might logically repurchase some of its own shares. This is a common practice by firms when they have surplus cash and wish to return value to shareholders, signaling the company's belief that its shares are undervalued or to improve financial ratios. Option a), declaring a stock dividend, is typically considered if the firm wants to reward shareholders but without disbursing cash, whereas option c), opting to issue preferred stock, usually occurs when a company needs to raise capital without increasing its debt burden or diluting existing shareholders’ value.
The disadvantage of borrowing money from a bank or issuing bonds is a firm’s commitment to scheduled interest payments, which can strain finances if income is not sufficient. However, this allows the firm to retain full control over its operations. On the other hand, issuing stock sells off a portion of company ownership to the public, making the company accountable to a board of directors and the shareholders. This method increases the firm's financial capital needed for expansion without the obligation to repay the funds, but it also means sharing control with investors and meeting regulatory requirements.