Question

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

Answer 1

Pecking Order Model of Capital structure :

Pecking Order model states that financing comes from three different ways I.e., internal funds, debt and equity.

As per this model, Companies first prefer internal financing (Retained earnings) and then goes for debt and lastly raising equity.

This theory maintains that businesses adhere to a hierarchy of financial sources and prefer internal financing when available and debt is preferred over equity if external financing is required.

Answer:(b)

Retained earnings, then debt , then external equity