Pecking Order Theory and Capital Structure Decisions

In the context of capital structure decisions, the Pecking Order Theory suggests firms prefer financing in a certain order based on the principle of information asymmetry. According to this theory, organizations will seek to leverage internal financing first, resort to debt second, and only turn to equity as a last resort when other options are not feasible. This approach is driven by the assumption that internal funds carry no transaction costs and eliminate the risk of sending negative signals to the market.

Consider a hypothetical firm that has just completed its internal financing round and is contemplating how to fund an upcoming expansion project. What is the most likely financing decision this firm will make next based on the tenets of Pecking Order Theory?