Final answer:
A company's ability to finance its expansion internally can be evaluated through free cash flow and reinvestment of earnings, which indicate the capacity to fund growth without external financing. Options A and E are the correct answers.
Step-by-step explanation:
Two common ways to assess a company's ability to internally finance its expansion needs are free cash flow and earnings reinvestment. Free cash flow represents the cash a company generates after accounting for cash outflows to support operations and maintain its capital assets. It reflects the company's ability to produce enough cash to pursue expansion projects after maintaining its current operations. On the other hand, reinvestment of earnings, which means using the company's own profits to finance its growth, is another key indicator for internal funding capability. By investing their earnings back into the company, firms can fund equipment, structures, and research and development without having to rely on external financing sources like bank loans, bonds, or equity financing.
For a company, the decision to use free cash flow or earnings reinvestment significantly impacts its financial and operational flexibility. Companies with ample free cash flow are in a better position to support expansion without additional debt or diluting shareholders' equity. Conversely, businesses with fewer profits or those in the early stages of development may need to rely more on external fundraising methods, such as borrowing from banks or issuing stock, to finance their growth endeavors.
To answer the student's question, the two common ways to assess a company's ability to internally finance its expansion needs are the free cash flow (option a) and the earned ratio, which pertains to reinvestment of earnings (option e).