Final answer:
Financial capital is the funds used by a company to finance its operations and investments. Profits, borrowing, and issuing stock are sources of financial capital. Firms choose between sources of financial capital based on various factors.
Step-by-step explanation:
Financial capital refers to the funds a company uses to finance its operations and investments. It includes money, stocks, bonds, and other financial assets that can be used to purchase resources or goods and services.
Profits are one source of financial capital for firms. If a company earns more revenue than its costs, it can choose to reinvest some of those profits into its business. This reinvestment can help the company acquire capital assets such as equipment, structures, and research and development.
Aside from profits, firms can also acquire financial capital through borrowing. They can borrow money from banks or issue bonds. Bonds are debt securities that companies sell to investors, promising to repay the principal amount with interest over a specified period of time. Another source of financial capital is corporate stock. By selling shares of stock, companies can raise funds from investors who become partial owners of the company.
In choosing between sources of financial capital, firms consider factors such as the cost and availability of capital, the risk involved, and the terms and conditions of borrowing or issuing stock.