According to the pecking order theory proposed by Stewart Myers of MIT,which of the following are correct?
i.For financing needs,firms prefer to first tap internal sources such as retained profits and excess cash.II.There is an inverse relationship between a firm's profit level and its debt level.III.Firms prefer to issue new equity rather than source external debt.IV.A firm's capital structure is dictated by its need for external financing.

Question

Quizplus · Accepted Answer

The pecking order theory states that firms prefer to first tap internal sources such as retained profits and excess cash, then issue new equity, and finally resort to external debt. This is because internal sources are the cheapest, followed by equity, and then debt. The theory also states that there is an inverse relationship between a firm's profit level and its debt level, as firms with higher profits are less likely to need to borrow money.

According to the Pecking Order Theory Proposed by Stewart Myers