With the Background Ideas of Using the Cheapest Source First

question 103

Multiple Choice

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.

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Definitions:

Circular-Flow Diagram

A pictorial scheme of the economy, focusing on the exchange of dollars between households and firms through the market system.

Product Market

The marketplace where final goods or services are traded between sellers and consumers.

Circular-Flow Diagram

A visual model that illustrates the flow of goods and services and money between households and firms in an economy.

Household

An individual or group of people living together and making joint decisions regarding consumption and finances.