Which of the following does the Pecking Order Hypothesis predict?
a. If external financing is required, firms should first seek debt financing.
b. Firms prefer internal financing first.
c. If external financing is required, firms will choose to issue the safest or cheapest security first, starting with debt financing and using equity as a last resort.
d. All of these
If external financing is required, firms will choose to issue the safest or cheapest security first, starting with debt financing and using equity as a last resort.
Option:(c)
Explanation:
The pecking order hypothesis is a major theory in corporate financing. It states that the “cost of financing increases with asymmetric information”.
If one client has information better than other than the study of decision made in the transactions is called as the asymmetric information.
So, for the firm to have the external financing, the order will be prioritized as 'debt financing' and using 'equity' as a 'last resort'.
