Which of the following is true about the pecking order theory?
A)Management will raise equity when the shares are overpriced on the market.
B)Management will raise debt finance before using excess retained earnings.
C)Management will raise equity when the shares are underpriced on the market.
D)None of the above

Question

Quizplus · Accepted Answer

The pecking order theory suggests that companies prefer to finance themselves first through internal funds, then with debt, and finally by issuing new equity. When shares are overpriced, it becomes cheaper for the company to issue new shares since it can raise more capital for fewer shares, aligning with the theory's implication that issuing new equity is a less preferred option, typically considered when other sources are exhausted or seem less advantageous.

Which of the Following Is True About the Pecking Order