Pecking Order Theory and Financing Decisions

In the context of capital structure decisions, companies often face challenges related to financing their operations and growth. According to the Pecking Order Theory, firms prioritize their sources of financing based on the principle of least effort or resistance. This theory suggests that companies prefer internal financing to external financing and, within external financing, they prefer debt over equity.

XYZ Corporation is evaluating a new project that requires funding of $5 million. The CEO mentioned that the company has enough retained earnings to cover the entire amount. However, the CEO also expressed concerns about taking on too much debt, which they believe could lead to higher financial risk.

Based on the principles of Pecking Order Theory, what would be the most likely course of action for XYZ Corporation in this scenario?