With the background ideas of using the cheapest source first and the impact of asymmetric information, the Pecking Order Hypothesis predicts which of the following?
A) Firms prefer internal financing second to external financing.
B) If external financing is required, firms should first seek equity financing.
C) If external financing is required, firms will choose to issue the riskiest security first, starting with debt financing and using equity as a last resort.
D) If external financing is required, firms will choose to issue the safest or cheapest security first, starting with debt financing and using equity as a last resort.
Answer: D
Explanation: D) The Pecking Order Theory predicts:
(1) Firms prefer internal financing FIRST.
(2) If external financing is required, firms will choose to issue the SAFEST OR CHEAPEST SECURITY FIRST, starting with debt financing and using equity as a last resort.
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