Final answer:
When a firm needs to finance a large expansion, it can choose to borrow or issue stock. Borrowing allows the firm to secure capital without diluting ownership, but comes with the obligation of repayment. Issuing stock can raise significant capital without debt, but results in dilution of ownership.
Step-by-step explanation:
When a firm needs to finance a large expansion, it can raise the necessary funds through borrowing or by issuing stock. Both options have their advantages and disadvantages.
Borrowing:
By borrowing from banks or issuing bonds, the firm can secure the needed capital without diluting ownership. This means that the existing owners maintain control of the firm. However, borrowing comes with the obligation of repaying the loan with interest, which can increase the firm's debt and interest expense.
Issuing Stock:
By selling stock, the firm can raise significant capital without incurring debt. This can be an attractive option, especially if the firm's prospects for growth and profitability are high. However, issuing stock results in dilution of ownership, as new shareholders become part owners of the firm.
The choice between borrowing and issuing stock depends on factors such as the firm's financial situation, growth potential, and risk tolerance.