CA Inter P6 · Chapter 5 · Question 7 of 9
According to the pecking order theory of capital structure, the order in which a firm prefers to raise funds is:
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: D) Internal accruals first, then debt, and new equity issue as a last resort
Explanation
Pecking order theory is based on information asymmetry. Managers prefer internal funds because they carry no issue costs and send no signal to the market. If external finance is needed, they prefer debt to equity, because a new equity issue may signal that management thinks the shares are overvalued.
More Financing Decisions – Capital Structure MCQs
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