Question

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

Answer 1

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)

Step-by-step 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'.