Which of the statements below is TRUE?
A)Debt capacity refers to the ability to add equity financing to the current borrowing of the firm and still be able to make interest and principal repayments on time.
B)The asymmetric information foundation for the Pecking Order Hypothesis (POH)is that managers know less about their companies than the outside world.
C)There are three implications of the POH.One of these is that profitable companies will borrow less (because they have more internal funds available)and may have lower debt-equity ratios because they have more debt capacity.
D)There are three implications of the POH.One of these is that more profitable companies will need more external funding and will first seek debt financing in an asymmetric world,avoiding the equity market.

Question

Quizplus · Accepted Answer

Debt capacity refers to the maximum amount of debt a firm can take on and still meet its financial obligations, not the ability to add equity financing. The asymmetric information foundation for the Pecking Order Hypothesis (POH) posits that managers know more about their companies than the outside world, not less. The correct statement, C, aligns with the POH by suggesting that more profitable companies, having more internal funds, will borrow less and potentially have lower debt-equity ratios due to not needing to utilize their debt capacity as much.

Which of the Statements Below Is TRUE