A firm can finance its purchase of new capital equipment (investment)in the following ways:
1)purchasing financial capital;
2)borrowing from a bank;
3)using its retained earnings.

Question

Quizplus · Accepted Answer

Option 1 only (purchasing financial capital) may not be the best choice as it may result in higher costs than borrowing or using retained earnings. Option 2 only (borrowing from a bank) may also not be the best choice if the firm does not have a good credit rating or if the interest rates are high. Option 3 only (using retained earnings) may limit the firm's ability to use those funds for other purposes such as expansion or research and development.

Therefore, the best choice would be to use a combination of options 2 and 3 (borrowing from a bank and using retained earnings). By using some of its retained earnings and borrowing the rest from a bank, the firm can reduce its interest costs while still maintaining some flexibility with its funds. Therefore, the correct answer is E (2 and 3).

A Firm Can Finance Its Purchase of New Capital Equipment