Holooly Plus Logo
Holooly Plus Logo

Question 8.11: What is meant by the pecking order theory of capital structu...

What is meant by the pecking order theory of capital structure?

The Blue Check Mark means that this solution has been answered and checked by an expert. This guarantees that the final answer is accurate.
Learn more on how we answer questions.

The pecking order theory of capital structure is the theory that states that companies have preference in the capital that they raise, with the preference order of internal equity (that is, retained earnings), debt, and then new equity.

Related Answered Questions

Explain how limited liability may affect the capital structure decisions of a corporation.

Verified Answer:
Because owners reap the benefits of gains, but do ...

Regarding financial slack: a. What is it? b. How is slack created? c. Why do companies wish to have financial slack?

Verified Answer:
a. Financial slack is the unused debt capacity of ...

List the potential direct and indirect costs associated with bankruptcy.

Verified Answer:
Costs associated with bankruptcy include the direc...

List the potential costs associated with financial distress.

Verified Answer:
Costs associated with financial distress include d...

Consider three financing alternatives: Alternative A: Finance solely with equity Alternative B: Finance using 50% debt, 50% equity Alternative C: Finance solely with debt a. Which of the three alternatives involves the greatest financial leverage? b. Which of the three alternatives involves the

Verified Answer:
a. Alternative C involves the greatest financial l...

What are the implications of the Modigliani-Miller theory of capital structure when the assumption of no corporate taxes is not valid?

Verified Answer:
When there are taxes, the Modigliani-Miller theory...

What is the relation between a company’s operating risk and its optimal capital structure?

Verified Answer:
The greater a company’s operating risk, the sooner...

What is traded off in the trade-off theory of capital structure?

Verified Answer:
The trade-off is between the benefit from interest...

Why do we adjust for taxes in determining the cost of debt, but not for the costs of preferred stock and common stock?

Verified Answer:
Interest on debt is tax deductible for the paying ...

If there are costs associated with financial distress, how may this affect the capital structure decision of a company?

Verified Answer:
Costs to financial distress discourage debt financ...