ExpertEasy2 marksMultiple Choice
ACCA · Question 08 · Business Finance
'BioGenix', a biotechnology firm, has exhausted its retained earnings after funding extensive R&D. According to the Pecking Order Theory of capital structure, what should be BioGenix's next preferred source of finance?
'BioGenix', a biotechnology firm, has exhausted its retained earnings after funding extensive R&D. According to the Pecking Order Theory of capital structure, what should be BioGenix's next preferred source of finance?
Answer options:
A.
A new issue of ordinary shares
B.
Straight debt
C.
Convertible bonds
D.
Venture capital
How to approach this question
Recall the hierarchy in the Pecking Order Theory: 1. Retained earnings, 2. Straight debt, 3. Convertible debt, 4. New equity.
Full Answer
B.Straight debt✓ Correct
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 funds (retained earnings), 2) Debt, and 3) New equity as a last resort. Since BioGenix has exhausted retained earnings, straight debt is the next preferred source.
Common mistakes
Confusing Pecking Order Theory with the Traditional View or Modigliani-Miller theories.
Practice the full ACCA FM — Financial Management Practice Exam 3
32 questions · hints · full answers · grading
More questions from this exam
Q01A global wildlife conservation NGO, 'FaunaProtect', is evaluating its financial management object...EasyQ02A national government has recently implemented an expansionary monetary policy to stimulate the e...MediumQ03'CloudSync', a rapidly growing SaaS (Software as a Service) startup, is experiencing cash flow di...MediumQ04'AgriGrow', an organic fertilizer producer, uses 10,000 tonnes of raw compost annually. The cost ...EasyQ05'SteelForge Inc' is deciding between two heavy forging machines. Machine A has a life of 3 years ...Medium