Implications of Pecking Order Theory on Capital Structure

Hard Capital Structure Decisions Pecking Order Theory

A company's financial manager is evaluating its capital structure and considering the implications of the pecking order theory. This theory suggests that firms prioritize their sources of financing according to the principle of least effort, or from least to most expensive forms of finance.

Given this context, which of the following statements best reflects the implications of the pecking order theory on capital structure decisions?

Firms prefer retained earnings over debt because it avoids the dilution of ownership and is less costly than external financing.

Firms will only issue equity as a last resort once debt capacity has been fully utilized, regardless of the cost of equity.

The pecking order theory suggests that firms aim for a target debt-to-equity ratio that signifies stable financing costs.

Hint

Submitted10.0K

Correct9.3K

% Correct93%