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By the pecking order theory of capital structure, which of these firms would be most likely...

  1. By the pecking order theory of capital structure, which of these firms would be most likely to use equity financing?
    1. A firm with large stockpiles of cash
    2. A firm with a high tax rate
    3. A firm with highly risk averse investors
    4. A firm that has lost access to the bond market
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Answer #1

Pecking order theory suggest that the most preferable way of financing is Internal financing, which is for a company with a good amount of cash. The second best way is debt as it helps firms in the higher tax brackets.

The least favorable way is Equity financing as the shareholders lose ownership.

The correct option is "D"

If a firm has lost access to the bond market, then it will have to depend on the equity market to raise capital.

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