According to pecking-order theory, managers will often choose to finance with:
A) new equity rather than debt, due to bankruptcy costs.
B) debt rather than new equity, to avoid reduced share price.
C) debt rather than retained earnings, to lower the WACC.
D)new equity rather than debt, to strengthen EPS.

Question

Quizplus · Accepted Answer

According to pecking-order theory, managers prefer to use internal funds first (such as retained earnings), then debt, and finally equity as a last resort. The theory suggests that managers view equity financing as a signal to the market that the company's stock is overvalued, which may result in a reduction in share price. Therefore, managers will choose debt financing over new equity to avoid a potential decrease in share price.

According to Pecking-Order Theory, Managers Will Often Choose to Finance