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

question 68

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

Costs that do not vary with the level of production or sales.

Short Run

A period in which at least one input, such as plant size or the number of firms in the market, is fixed and cannot be changed.

Fixed Cost

Any cost that does not depend on the firms’ level of output. These costs are incurred even if the firm is producing nothing. There are no fixed costs in the long run.

Marginal Costs

Marginal Costs involve the additional expenses incurred from the production of one extra unit of a product or service.