according to the pecking-order theory, there is no optimal capital structure. explain why!

Expert Solution

As per the pecking order theory, if a firm wants to raise capital then the most beneficial is through its retained earnings, once the retained earnings gets exhausted only then should a firm raise capital externally through raising additional equity. As we raise equity through debt and equity rather than retained earnings, the cost and risk also keeps on increasing.

As per the pecking order theory, there is no optimal level of debt to equity ratio. Raising money, through debt is cheap and simple than raisng it through equity which leads to ownerhaip dilution on the firm. Profitable firms prefer raisng additional capital through debt. Hence, there is no optimal capital structure.

jeff jeffy answered 2 years ago

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