In which scenario would a company mainly rely on retained earnings?

A company would mainly rely on retained earnings to fund research and development projects because retained earnings represent the profits that have already been generated by the company but not distributed to shareholders as dividends. This internal source of financing allows a company to reinvest in initiatives like research and development without incurring additional debt or diluting ownership by issuing new equity. Using retained earnings for R&D enables the company to innovate, improve products, and potentially generate more profits in the future.

Other options focus on scenarios where financing strategies may differ. For instance, paying dividends directly utilizes the company’s profits, but it does not necessarily imply reinvestment; it represents a distribution of profits rather than a reinvestment of retained earnings. Purchasing new machinery, especially at a low interest rate, could be more advantageous through borrowing as it allows the company to preserve its retained earnings for other uses while taking advantage of low interest costs. Covering operational costs might also utilize retained earnings; however, this situation might involve various financing strategies and does not focus on growth or long-term investment, making retained earnings a less prominent source in that context.