Section A

According to the Pecking Order Theory of capital structure, companies prioritize their sources of financing based on the principle of least effort and lowest information asymmetry.

Which TWO of the following statements align with the Pecking Order Theory?

The Pecking Order Theory suggests that managers have a strict hierarchy for financing: 1. Retained earnings (internal, no issue costs, no signaling issues). 2. Debt (external, lower issue costs than equity, less negative signaling). 3. Equity (last resort, high issue costs, signals that shares might be overvalued). It explicitly rejects the idea of a target optimal capital structure.