General Studies · Capital Structure Theories
In corporate financial management, a firm may follow the 'Pecking Order Theory' to determine its method of financing for new projects. This strategy is most accurately characterized by a preference where:
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- 1internal retained earnings are utilized first to minimize information asymmetry and issuance costs.✓
- 2external equity is issued as the first resort to maintain a high level of liquid cash reserves.
- 3convertible debentures are prioritized over all other forms of funding to dilute ownership early.
- 4short-term high-interest trade credit is preferred over long-term low-interest institutional debt.
Correct answer
internal retained earnings are utilized first to minimize information asymmetry and issuance costs.
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