The Pecking Order Theory of Capital Structure Suggests That Managers

question 51

Essay

The pecking order theory of capital structure suggests that managers will choose to utilize retained earnings before issuing additional debt when financing new projects. Does that imply anything about the flotation costs of issuing new securities?

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Definitions:

Net Profit Margin Percentage

This is a financial metric that represents the percentage of revenue that remains as profit after all operating expenses, interest, taxes, and preferred stock dividends have been deducted from a company's total revenue.

Cost of Goods Sold Percentage

A ratio that compares the cost of goods sold to the total sales revenue, indicating the efficiency of production and pricing.

Asset Turnover Ratios

Ratios that capture how efficiently a company uses its assets.

Solvency Ratios

Ratios that measure a company’s ability to meet its long-term obligations.