Question

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.

Answer 1

Pecking order theory states that a company first uses its available funds (internal equity) for funding, if it is not sufficient then he goes for debt which is costlier than the internal funds. If debt is also insufficient, then he issues fresh equity which has higher cost than the debt. This goes in this order, the cost increases in an ascending order.

Option B is consistent with pecking order theory. If it is more profitable, company will have sufficient funds for any capital expenditure, so his debt tends to decrease