In what situation might a company prefer to rely on internal financing?

In what situation might a company prefer to rely on internal financing?

• A. When external capital markets are favorable
• B. When expansion opportunities arise
• C. When looking to avoid issuing new securities
• D. When facing high competition

Answer: (C)

A company may prefer to rely on internal financing to avoid issuing new securities primarily to maintain control over its equity and to avoid the costs associated with external financing. Internal financing utilizes funds generated from the company's own operations, such as retained earnings, which does not dilute ownership or impose additional obligations to external stakeholders. By opting for internal financing, the company can avoid the potential complications and expenses involved in the fundraising process, such as underwriting fees, regulatory costs, and the time required to go through capital markets. Additionally, avoiding issuance of new securities can help manage the company’s capital structure and maintain a more favorable perception in the eyes of investors and creditors. In summary, choosing internal financing allows the company to pursue its financial strategies without the complexities or financial burdens associated with tapping into external capital markets.

A company may prefer to rely on internal financing to avoid issuing new securities primarily to maintain control over its equity and to avoid the costs associated with external financing. Internal financing utilizes funds generated from the company's own operations, such as retained earnings, which does not dilute ownership or impose additional obligations to external stakeholders.

By opting for internal financing, the company can avoid the potential complications and expenses involved in the fundraising process, such as underwriting fees, regulatory costs, and the time required to go through capital markets. Additionally, avoiding issuance of new securities can help manage the company’s capital structure and maintain a more favorable perception in the eyes of investors and creditors.

In summary, choosing internal financing allows the company to pursue its financial strategies without the complexities or financial burdens associated with tapping into external capital markets.