The pecking order states how financing should be raised.In order to avoid asymmetric information problems and misinterpretation of whether management is sending a signal on security overvaluation the firm's first rule is to:
A)issue convertible debt prior to straight debt to save funds.
B)use short-term debt to its maximum available limit prior to issuing long-term debt.
C)issue new equity first in order to retain internal funds and avoid interest costs.
D)issue new debt prior to new equity.
E)use internal financing prior to external financing.

Question

Quizplus · Accepted Answer

The best choice is to use internal financing prior to external financing. This is because external financing (i.e. issuing debt or equity) can be costly due to interest rates, fees, and dilution of ownership. By using internal financing, such as retained earnings, the firm can avoid these costs and maintain control over the company. Additionally, using internal financing can help signal to investors that the firm is financially stable and does not need to rely on external financing.

The Pecking Order States How Financing Should Be Raised