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Which of the following statement about pecking order capital structure theory is NOT true? Asymmetric information...

Which of the following statement about pecking order capital structure theory is NOT true?

Asymmetric information between management and investors is considered in capital structure decisions.

There is an optimal debt ratio for a corporation.

Firms prefer internal finance.

If external finance is required, firms issue safest security first.
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Answer #1

According to pecking order capital structure theory, if a firm decides to raise finances, it first goes for internal financing (retained earnings). If no internal financing is available, the firm goes for external financing with least risk. Usually, debt financing is less risky for the firm when compared to equity financing. Also, pecking order theory, asymmetric information between management and investors is considered in capital structure.

Therefore, the False statement in this question would be that "there is an optimal debt ratio for a corporation."

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