The pecking-order model of capital structure suggests the order in which firms prefer to raise capital is:
A)debt,then retained earnings,then external equity.
B)retained earnings,then debt,then external equity.
C)preferred stock,then debt,then external equity.
D)debt,then external equity,then retained earnings.

Question

Quizplus · Accepted Answer

The pecking-order theory of capital structure suggests that firms prefer to use internal sources of funding, such as retained earnings, before turning to external sources of funding such as debt or equity. Thus, the correct order in which firms prefer to raise capital is retained earnings, followed by debt, and then external equity. Therefore, the best choice from the given options is B.

The Pecking-Order Model of Capital Structure Suggests the Order in Which