Question

Which of the following is/are correct? The pecking-order theory states that firms prefer to issue equity...

Which of the following is/are correct?

  1. The pecking-order theory states that firms prefer to issue equity rather than debt if internal financing is insufficient.

II. The pecking-order theory suggests that profitable firms use more debt.

  1. The trade-off theory of capital structure implies that there is an optimal level of debt for firms, given the benefits of tax shields and the costs of financial distress.
  1. I only
  2. I and II only
  3. III only
  4. all of the above
  5. none of the above
Business   Finance   
0 0
Add a commentTranscribed image text
Next >

Homework Answers

Answer #1

Option C is correct.

Pecking Theory states that a firm uses the internal funds i.e. Retained Earnings first of all and then Debt and then Equity is the last resort and profitable firms uses retained earnings. The trade-off theory of capital structure implies that there is an optimal level of debt for firms, given the benefits of tax shields and the costs of financial distress.

NOTE: The answer to your question has been given below/above. If there is any query regarding the answer, please ask in the comment section. If you find the answer helpful, do upvote. Help us help you.

0 0
Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Log In

Sign Up

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
According to the "pecking =-order theory" proposed by Stewart Myers of MIT, which of the following...
According to the "pecking =-order theory" proposed by Stewart Myers of MIT, which of the following is/are correct? 1. For financing needs, firms prefer to first tap internal resources such as retained earnings, profits and excess cash 2. There is an inverse relationship between a firm's profit level and its debt level 3. Firms prefer to issue new equity rather than source external debt. 4. A firms capital structure is dictated by its need for external financing 1. 1 and...
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.
the pecking order model of capital structure suggests the order in which firms prefer to raise...
the pecking order model of capital structure suggests the order in which firms prefer to raise capital is_____ a. debt, then retained warnings, then external equity b. retained earnings, then debt, then external equity c. preferred stock , then debt, then external equity d. debt, then external equity, then retained earnings
The trade-off theory suggests that: I. Holding other things constant, firms respond to a decrease in...
The trade-off theory suggests that: I. Holding other things constant, firms respond to a decrease in tax rate by issuing more debt II. Holding other things constant, firms respond to a decrease in tax rate by issuing less debt III. Firms issue debt only when they have investment opportunities that they cannot finance with internal sources a. I b. II c. I, III d. II, III
According to the pecking order theory, debt financing and internal financing are superior to equity financing,...
According to the pecking order theory, debt financing and internal financing are superior to equity financing, but we know that many great companies are public companies, such as Apple and Google. Therefore, going public must have some benefits beyond this theory. Please use some listed companies you are familiar with to illustrate the benefits of equity financing. Question: 1.In addition to the goal of raising money, how can these companies benefit from going public? 2.As far as you know, do...
By the pecking order theory of capital structure, which of these firms would be most likely...
By the pecking order theory of capital structure, which of these firms would be most likely to use equity financing? A firm with large stockpiles of cash A firm with a high tax rate A firm with highly risk averse investors A firm that has lost access to the bond market
Which one of the following statements is consistent with the pecking order theory A. In an...
Which one of the following statements is consistent with the pecking order theory A. In an average year, public companies actually repurchase more shares than they sell. B. The more profitable a company is, the less debt it tends to have. C. All of the above. D. None of the above.
The pecking order theory of capital structure predicts that firms will fund positive NPV projects first...
The pecking order theory of capital structure predicts that firms will fund positive NPV projects first with internally generated funds, then with debt, and finally with new equity. What is the primary insight of the pecking order story theory that leads to this funding ordering in which equity is only issued as a last resort? A. Issuing debt is always superior to issuing equity because interest paid to debtholders is tax deductible whereas dividends paid to shareholders are not. B....
Hens Inc. has a total debt ratio of 60%, which is slightly above the industry average...
Hens Inc. has a total debt ratio of 60%, which is slightly above the industry average total debt ratio of 55% . Hens Inc. decides to follow only pecking order theory when deciding how to raise capital to pay for new projects, so they should Multiple Choice use equity to get closer to the optimal capital structure then issue additional debt if necessary. use internal financing prior to external financing. use short-term debt to its maximum available limit prior to...
Which of the following is NOT a likely financing policy for a rapidly growing business? I....
Which of the following is NOT a likely financing policy for a rapidly growing business? I. If external financing is necessary, use debt to the point it does not affect financial flexibility. II. Maintain an aggressive leverage ratio to enjoy interest tax shields and inject additional discipline in respect to management incentives. III. Borrow funds rather than limit growth, thereby limiting growth only as a last resort. IV. Adopt a modest dividend payout policy that enables the company to finance...
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT