The pecking order theory of capital structure suggests that firms follow which order when raising capital?
A)Internal cash flow, issue debt, issue equity
B)Internal cash flow, issue equity, issue debt
C)Issue debt, internal cash flow, issue equity
D)Issue debt, issue equity, internal cash flow

Question

Quizplus · Accepted Answer

The pecking order theory suggests that companies prioritize their sources of financing (from internal financing to equity) according to the principle of least effort, or least resistance, preferring to raise equity as a last resort. Hence, they start with internal cash flows, then debt, and finally equity if necessary.

The Pecking Order Theory of Capital Structure Suggests That Firms