ExpertEasy2 marksMultiple Choice
ACCA · Question 10 · Business Finance
Section A
BioGenix, a profitable biotechnology firm, needs to raise $20 million for clinical trials. According to the Pecking Order Theory of capital structure, which source of finance will BioGenix prioritize FIRST?
Section A
BioGenix, a profitable biotechnology firm, needs to raise $20 million for clinical trials. According to the Pecking Order Theory of capital structure, which source of finance will BioGenix prioritize FIRST?
Answer options:
A.
Issue of new ordinary shares
B.
Issue of convertible bonds
C.
Bank loan
D.
Retained earnings
How to approach this question
Recall the hierarchy of the Pecking Order Theory: 1. Internal funds, 2. Debt, 3. Equity.
Full Answer
D.Retained earnings✓ Correct
The Pecking Order Theory suggests that companies prioritize their sources of financing based on the principle of least effort, lowest cost, and minimal information asymmetry. The order is: 1) Retained earnings (internal funds), 2) Straight debt, 3) Convertible debt, 4) New equity.
Common mistakes
Confusing the Pecking Order Theory with the Traditional View or Modigliani-Miller theories, which seek an optimal mix of debt and equity.
Practice the full ACCA FM — Financial Management Practice Exam 1
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