The Pecking Order Theory of Capital Structure Implies That

question 62

Multiple Choice

The pecking order theory of capital structure implies that:
I. Risky firms will end up borrowing more
II. Firms prefer internal finance
III. Firms prefer debt to equity when external financing is required

• A) I only
• B) II only
• C) II and III only
• D) III only

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Definitions:

Investments

Assets or items acquired with the intention of generating income or appreciation over time, including stocks, bonds, real estate, or other vehicles.

Liquidity

The simplicity of turning an asset into cash without impacting its market value.

Terminal Value

An estimate of a project's or company's value at the end of a forecast period, extending beyond the period of explicit cash flow projections.

Non-Normal Cash Flows

Cash flow patterns that don't follow a regular, predictable pattern, often encountered in investment analysis.