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)finance with internally generated funds.
B)always issue debt then the market won't know when management thinks the security is overvalued.
C)issue new equity first.
D)issue debt first.
E)None of the above.

Question

Quizplus · Accepted Answer

The best choice is A because financing with internally generated funds avoids the need to signal the market and reduces the chances of asymmetric information problems. By using retained earnings or profits, the firm can finance itself without raising suspicions or doubt among its stakeholders. This strategy also allows the firm to maintain control over decision-making and avoid the costs associated with issuing new securities or paying interest on debt.

The Pecking Order States How Financing Should Be Raised