The Pecking Order Theory of Capital Structure Implies That

question 27

Multiple Choice

The pecking order theory of capital structure implies that:
I.high-risk 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:

Net Income

The residual financial gain of a business following the deduction of every expense, tax, and cost from its total revenue.

Accounting Cycle

The collective process of recording and processing the accounting events of a company, culminating in the production of financial statements within a specific period.

Income Summary

An account used in the closing process that summarizes the revenues and expenses for an accounting period before transferring the net income or loss to owner's equity.

Revenue and Expense Accounts

Accounts in the general ledger that track the income generated from sales and the costs incurred during business operations, respectively.