Final answer:
In reality, most established firms prefer to cover the equity portion of their capital spending with retained earnings, using their own profits as a primary source of financial capital for reinvestment.
Step-by-step explanation:
In reality, most firms cover the equity portion of their capital spending with retained earnings. Firms often have to spend money to make money, investing in long-term assets like machinery, buildings, or research and development to generate future profits. While firms can raise capital through early-stage investors, borrowing from banks or bonds, or selling stock, many established firms prefer to use their own profits to reinvest into the company. This approach allows them to finance their operations without diluting ownership through issuing more stock or incurring debt from loans or bonds. For many companies, reinvesting their profits is a primary source of financial capital, particularly in periods where they are earning more revenues than their costs.