Section A

According to the Pecking Order Theory of capital structure, which of the following statements are TRUE regarding how a company should prioritize its sources of finance? (Select ALL that apply)

The Pecking Order Theory suggests that firms prioritize their sources of financing based on the principle of least effort and lowest asymmetric information costs. The order is: 1. Internal financing (retained earnings) - no issue costs, no signaling issues. 2. Debt - lower issue costs than equity, tax-deductible interest. 3. New equity - last resort due to high issue costs and the negative signal it sends to the market (that management thinks the stock is overvalued).