The Pecking Order Theory Identifies Two Rules

question 15

Multiple Choice

The pecking order theory identifies two rules.The first rule is to

• A)issue convertible debt prior to straight debt to save funds.
• B)use short-term debt to its maximum available limit prior to issuing long-term debt.
• C)issue new equity first in order to retain internal funds and avoid interest costs.
• D)issue new debt prior to new equity.
• E)use internal financing prior to external financing.

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Definitions:

Consolidated Income Statement

A financial statement that presents the combined financial results of a parent company and its subsidiaries as one single entity.

Income Tax Expense

The amount of money a company owes in taxes based on its taxable income for a given fiscal period.

Cost Method

An accounting method used for investments, where the investment is recorded at cost and earnings from the investment are recognized only when dividends are received.

Retained Earnings

The portion of a company's profit that is held or retained and not paid out as dividends to shareholders.