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 firms should prioritize their sources of funding in a specific order: first, internal funds; second, debt financing; and finally, equity financing. Therefore, the best choice is B, as the theory suggests that issuing equity should only happen after the firm reaches its optimal debt capacity. The other choices are not consistent with the pecking order theory.

The Pecking Order Theory States That When External Funds Are