Which one of these statements is a correct implication of the pecking order theory?
A)External financing should be limited to debt issues.
B)The target debt level occurs when the marginal benefit of debt equals the marginal cost of debt.
C)Companies like financial slack so they can reduce their external capital needs.
D)Internally funded projects lower the market value of equity.
E)Profitable firms use more debt.

Question

Quizplus · Accepted Answer

The pecking order theory suggests that companies prefer to finance their projects internally using retained earnings, followed by debt financing and then equity financing as a last resort. Therefore, companies would like to have financial slack so that they can reduce their external capital needs.

Which One of These Statements Is a Correct Implication of the Pecking