The business decides to pay the investments of the firm with their own profits
When a business company generates profits, it has to dedcide how to distribute that profits. The business company has many options.
When a business company generates profits , it has to decide how to distribute that profits. The business company has many options.
One of them is to distribute between the owners who invested in this company. They are the owners of a part of the enterprise. As a result, they receive dividends periodically ( they receive a quantity money for each share which had been bought by shareholders).
Other reason would be to obtain capital from others organizations (external financing).
However, we are talking about internal financing. Consequently, we have decided this to use the profits to develop a new investment.
Why have we decided this? Because it’s cheaper than external financing ( there aren’t transactions costs or taxes which have a relation with the paid of dividends). Although , not everything is advantages because it isn’t flexible and the capitaul increase is not possible; Between others reasons.