Pecking Order Theory and Financing Decisions

The Pecking Order Theory is a financial theory that explains the preference of companies for different sources of financing. According to this theory, firms prioritize their sources of financing based on the principle of least effort or resistance. When a firm requires funds, it will first utilize internal financing before seeking external sources. The order of preference for external financing is generally debt before equity.

Consider a small technology firm that has consistently generated positive earnings but is concerned about the dilution of its ownership structure. The firm has available cash reserves but is considering financing a new project. Based on the Pecking Order Theory, which of the following financing decisions is most aligned with the theory?