Understanding Pecking Order Theory in Capital Structure

ABC Corporation is considering its capital structure decisions and is wondering how to prioritize its sources of financing. The management believes that, according to the Pecking Order Theory, the company should follow a certain order when raising funds. The Pecking Order Theory suggests that firms prefer internal financing over external financing, and when external financing is needed, they prefer debt over equity.

The CFO, Jane Smith, is analyzing the implications of this theory in the context of ABC Corporation's future growth plans and existing financial condition. She realizes that understanding the proper sequence of financing sources is crucial in maintaining optimal capital structure and minimizing costs.