The pecking order states how financing should be raised.In order to avoid asymmetric information problems and misinterpretation of whether management is sending a signal on security overvaluation the firm's first rule is to:
A)issue new equity first.
B)always issue debt then the market won't know when management thinks the security is overvalued.
C)finance with internally generated funds.
D)issue debt first.
E)None of the above.

Question

Quizplus · Accepted Answer

Financing with internally generated funds avoids the need to issue new securities, thus avoiding the asymmetric information problem and the possibility of misinterpretation by the market. Additionally, this option allows the firm to maintain control over its ownership structure and avoid potential adverse effects on the firm's credit rating caused by taking on additional debt or issuing new equity.

The Pecking Order States How Financing Should Be Raised