Final answer:
Both statements a and b are correct, indicating that retained profits are a source for expansion and there is a concept of a self-supporting growth rate which can be calculated without external capital.
Step-by-step explanation:
The correct statements are: a. As long as a firm does not pay out 100% of its earnings, the firm's annual profit that is retained in the business (i.e., the addition to retained earnings) is another source of funds for a firm's expansion. And b. The maximum growth rate that a firm can achieve with no access to external capital is called the firm's self-supporting growth rate. It can be calculated by using the AFN equation with AFN equal to zero and solving for g.Therefore, the direct answer in 2 lines is: c. All of the above are correct.
Firms can indeed use retained earnings to support expansion and also have a self-supporting growth rate that reflects the maximum growth achievable without external capital.To elaborate, when firms generate profits, they can reinvest a portion of those profits back into the company, which serves as a financial capital source. This reinvestment strengthens the firm's capacity for expansion and innovation. The self-supporting growth rate is critical because it shows the pace at which a company can grow by solely relying on internal resources without needing to seek additional external funds. By keeping this rate in mind, businesses can plan their growth strategies accordingly and measure the effectiveness of their reinvestment decisions.