Question

Often, the central problem in any business is that money is needed to make money. The following discusses the sale of equity, which is one response to this problem.

Sale of Capital Stock: a way to obtain capital through the sale of stock to individual investors beyond the scope of one’s immediate acquaintances. Periods of high interest rates turn entrepreneurs to this equity market. This involves, of necessity, a dilution of ownership, and many owners are reluctant to take this step for that reason. Whether the owner is wise in declining to use outside equity financing depends upon the firm’s long-range prospects. If there is an opportunity for substantial expansion on a continuing basis and if other sources are inadequate, the owner may decide logically to bring in other owners. Owning part of a larger business may be more profitable than owning all of a smaller business.

The passage implies that an owner who chooses not to sell capital stock despite the prospect of continued expansion is:

• A. subject to increased regulation
• B. more conservative than is wise under the circumstances
• C. likely to have her ownership of the business diluted
• D. sacrificing security for rapid growth

Answer 1

The correct option is B more conservative than is wise under the circumstances

Option (B) is the correct answer. Check the video for the approach.