According to Pecking-Order Theory, Managers Will Often Choose to Finance

question 108

Multiple Choice

According to pecking-order theory, managers will often choose to finance with:

• A) new equity rather than debt, due to bankruptcy costs.
• B) debt rather than new equity, to avoid reduced share price.
• C) debt rather than retained earnings, to lower the WACC.
• D)new equity rather than debt, to strengthen EPS.

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Definitions:

Fixed Costs

Expenses that do not change with the level of production or sales, such as rent, salaries, and insurance.

Variable Costs

Expenses that change in proportion to the activity of a business, such as materials and labor.

Marginal Cost

The incremental cost involved in creating an extra unit of a product or service.

Diseconomies of Scale

Occur when a firm's costs per unit increase as its output increases, opposite to economies of scale.