According to the pecking-order theory,a firm's leverage ratio is determined by:
A)the value of the tax benefit of debt.
B)equating the tax benefit of debt to the financial distress costs of debt.
C)the firm's financing needs.
D)the market rate of interest.
E)the profitability of the firm.

Question

Quizplus · Accepted Answer

According to the pecking-order theory, a firm's leverage ratio is primarily determined by its financing needs. This theory suggests that firms will prioritize internal funding, followed by debt, and then equity issuance, in order to meet their financing needs. As such, a firm's leverage ratio will be influenced by the amount of financing it requires to fund its operations, investments, and growth opportunities.

According to the Pecking-Order Theory,a Firm's Leverage Ratio Is Determined