Which one of these statements is a correct implication of the pecking order theory?
A)External financing should be limited to debt issues.
B)The target debt level occurs when the marginal benefit of debt equals the marginal cost of debt.
C)Companies like financial slack so they can reduce their external capital needs.
D)Internally funded projects lower the market value of equity.
E)Profitable firms use more debt.

Question

Quizplus · Accepted Answer

The pecking order theory suggests that companies prefer to use internal funds (such as retained earnings) rather than external financing (such as issuing new equity or debt). This is because external financing can signal that the company does not have enough financial slack, which can lower investor confidence and increase the cost of future external financing. Therefore, option C, stating that companies like financial slack to reduce their external capital needs, is a correct implication of the pecking order theory. The other options are not directly related to the pecking order theory.

Which One of These Statements Is a Correct Implication of the Pecking