Why might ABC prefer retained profit for expansion?

Why might ABC prefer retained profit for expansion?

• A. It avoids interest payments
• B. It reduces control by issuing more shares
• C. It guarantees profits
• D. It increases risk

Answer: (A)

Using retained profits means funding expansion from profits already earned and kept in the business, so there’s no need to borrow. Because there’s no loan, there are no interest payments to service, which reduces the cost of expansion and avoids debt-related risks. It also helps keep control because no new external investors are brought in. While retained profits don’t guarantee profits and aren’t without opportunity costs, they provide a cheaper, self-financed way to grow.

Using retained profits means funding expansion from profits already earned and kept in the business, so there’s no need to borrow. Because there’s no loan, there are no interest payments to service, which reduces the cost of expansion and avoids debt-related risks. It also helps keep control because no new external investors are brought in. While retained profits don’t guarantee profits and aren’t without opportunity costs, they provide a cheaper, self-financed way to grow.