Which one of the following is not implied by the pecking order theory?
A)Profitable firms tend to use less debt than unprofitable firms.
B)Companies like having financial slack.
C)Companies prefer to borrow up to the point where the financial distress costs offset the tax benefit of debt.
D)There is no target debt-equity ratio for a firm.
E)Firms tend to accumulate cash in anticipation of future projects.

Question

Quizplus · Accepted Answer

The pecking order theory suggests that companies prioritize their sources of financing (from internal financing to equity) according to the principle of least effort, or least resistance, implying no specific target debt-equity ratio but rather a preference for internal over external financing. It does not imply that companies prefer to borrow up to the point where financial distress costs offset the tax benefits of debt; this concept is more closely related to the trade-off theory of capital structure.

Which One of the Following Is Not Implied by the Pecking