Understanding Pecking Order Theory in Capital Structure

Easy Capital Structure Decisions Pecking Order Theory

Consider a firm that is planning to finance its future growth through a mix of debt and equity. According to the Pecking Order Theory, firms prefer to finance new projects using internal funds before resorting to external financing. This theory suggests that due to information asymmetries, a company will opt for a hierarchy of financing sources. Which of the following statements regarding the Pecking Order Theory is correct?

Firms prefer equity financing over debt due to lower risk.

Firms tend to use internal financing first, then debt, and finally equity.

Firms will always issue debt over equity to avoid ownership dilution.

Hint

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