The pecking order theory identifies two rules.The first rule is to
A)issue convertible debt prior to straight debt to save funds.
B)use short-term debt to its maximum available limit prior to issuing long-term debt.
C)issue new equity first in order to retain internal funds and avoid interest costs.
D)issue new debt prior to new equity.
E)use internal financing prior to external financing.

Question

Quizplus · Accepted Answer

The pecking order theory states that companies prefer to use internal financing (retained earnings) first before seeking external financing, such as debt or equity. This is due to the cost of external financing and the preference to maintain control over the company. Therefore, the best choice is E, to use internal financing prior to external financing.

The Pecking Order Theory Identifies Two Rules