Question

In the pecking order theory of financing, debt is preferred to equity financing because A. Cost of debt is lower than the cost of equity B. Debt financing increases the EPS of the firm C. Issuing debt is considered more positive by the markets D. Tax benefits of debt exceed the expected costs of financial distress

Answer 1

C. Issuing debt is considered more positive by the markets

Step-by-step explanation:

According to the pecking order theory a firm may raise money in the following order,

1. Internal finance (retained earnings and other sources)
2. Dept Finance
3. Equity Finance

Issuing debt is preferred as the market interprets this as a strength. Generally there is asymmetric information and the market believes that only that firm goes for debt financing that can actually afford and pay it. The firm that can pay of its debt obligations is often considered healthier.

Hope that helps.