Question

Northwest Wholesale Foods sells common stock. The company is using 

a. equity financing and the return shareholders earn is fixed. 

b. equity financing and the return shareholders earn depends on how profitable the company is. 

c. debt financing and the return shareholders earn is fixed. 

d. debt financing and the return shareholders earn depends on how profitable the company is.

Answer 1

When a company obtains money by way of selling the common stock then it is said that the company is engaging in equity financing.

In the case of equity financing, the returns that shareholders will earn, in part, depends on the profitability of the company.

If the company is profitable or its profitability is increasing then the demand for its share will increase leading to an increase in the price of shares and thereby the returns of shareholders will increase and vice versa.

So,

If Northwest Wholesale Food sells common stock then the company is using equity financing and the return shareholders earn depends on how profitable the company is.

Hence, the correct answer is the option (b).