The pecking order theory states that when external funds are required,a firm should
A)refund all monies pulled from internal sources with external funds.
B)only issue equity securities after the firm's debt capacity is reached.
C)never issue any convertible securities.
D)issue convertible bonds prior to straight bonds.
E)limit its debt-equity ratio to no more than 0.5.

Question

Quizplus · Accepted Answer

The pecking order theory suggests that a firm should use its internal funds first and then move on to debt financing before considering equity financing. Within debt financing, a firm should exhaust all options for traditional debt before issuing any convertible securities. And within equity financing, a firm should first issue common stock before moving towards preferred stock or other hybrid securities. Therefore, the best choice according to the pecking order theory is to only issue equity securities after the firm's debt capacity is reached, as stated in option B.

The Pecking Order Theory States That When External Funds Are