Question

Why can firms not just use their own profits for

financial capital, with no need for outside investors?

Short answer

Because it disrupt the cycle of earning profits.

Step-by-step solution

Step 1. Definition

An investor is a person that gives capital with the assumption of a future financial profit or gain.

Step 2. Explanation

If the firms don’t allow the shareholders and investors to invest in the firm and used their own capital, they might not be able to earn the desired profits. Because this is a financial cycle as investors invest in the firm, they get the dividend which tells that firm is healthy and will earn more profits in the future so they will invest more funds in the firm, and in return, the firm will earn more profits through more investments.