The correct order in which companies prefer to raise financing according to pecking order theory is:
A) internal cash flow, debt, issuing common equity.
B) issuing common equity, debt, internal cash flow.
C) issuing common equity, internal cash flow, debt.
D) debt, internal cash flow, issuing common equity
E) internal cash flow, issuing common equity, debt.

Question

Quizplus · Accepted Answer

Pecking order theory suggests that companies prioritize their sources of financing from internal funds first, then debt, and finally equity as a last resort. This is because internal financing is the least expensive and least risky, while issuing new equity is often the most expensive due to flotation costs and the potential dilution of existing shareholders' value.

The Correct Order in Which Companies Prefer to Raise Financing