Final answer:
Financial flexibility refers to the ability of a firm to raise cash by selling assets, issuing stock, or borrowing. This concept is crucial for a company's financial strategy as it has to choose between maintaining control and taking on debt obligations or diluting ownership but possibly achieving greater financial freedom.
Step-by-step explanation:
The ability to raise additional cash by selling assets, issuing stock, or borrowing more is termed financial flexibility. Firms often need to access financial capital to finance their growth, and investments or to manage their operations. The options available for a firm to obtain such capital include borrowing from banks, issuing bonds, or selling stock. While borrowing from a bank or issuing bonds has the downside of committing to scheduled interest payments regardless of income levels, it does allow the firm to maintain control over its operations without being accountable to shareholders. On the other hand, issuing stock results in selling off a portion of the company's ownership to the public, thus giving up some control and becoming responsible to a board of directors and shareholders.
Each method of raising capital has its own set of trade-offs. Borrowing ensures that shareholders do not lose any control of the company, but creates a financial obligation. Issuing stock dilutes ownership but does not require regular interest payments and might offer more financial freedom if the company is not tied to debt repayments. By evaluating their ability to generate future profits and their current financial positions, companies decide on the most suitable method to raise the funds they need. This assessment and decision-making process is a critical aspect of a company’s overall financial strategy and its ability to respond to opportunities and challenges.