Under the pecking order theory, debt is factually the cheapest source of funds due to the interest tax shield.

Question

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The pecking order theory suggests that companies prioritize their sources of financing based on the principle of least effort, preferring internal financing first, then debt, and issuing equity as a last resort. It does not claim that debt is factually the cheapest source of funds, but rather that it is preferred over equity due to lower information asymmetry and costs.

Under the Pecking Order Theory, Debt Is Factually the Cheapest