Question

Which of the following is/are true? I. According to the pecking order theory proposed Stewart Myers of MIT, firms prefer to source external debt rather than issue new equity. II. According to the pecking order theory proposed Stewart Myers of MIT, firms avoids issuing because they don't want to commit to paying dividends on the new equity. III. According to the pecking order theory proposed Stewart Myers of MIT, for financing needs, firms prefer to first tap internal sources such as retained profits and excess cash.

       I and III only
       II only
       II and III only
       I and II only
       I, II, and III

Answer 1

CORRECT ANSWER : I AND III ONLY

ACCORDING TO THE THEORY PROPOSED BY STEWART MYERS, FIRST OF ALL COMPANY USES INTERNAL ACCRUALS TO GROW THE BUSINESS.

ONCE THAT IS OVER, COMPANY WILL GO FOR EXTERNAL DEBT. THE BASIC REASON BEHIND IT IS THAT IT SHOWS STRENGTH OF COMPANY IN REPAYING INTEREST.

AND LASTLY, THE NEW EQUITY.

ACCORDING TO AUTHOR, EQUITY ISSUANCE GIVE A BAD SIGNAL TO THE MARKET. IT IMPLIES THAT SHARES ARE OVERVALUED SO PRICE FALLS.

I. According to the pecking order theory proposed Stewart Myers of MIT, firms prefer to source external debt rather than issue new equity. : TRUE

II. According to the pecking order theory proposed Stewart Myers of MIT, firms avoids issuing because they don't want to commit to paying dividends on the new equity. : FALSE
III. According to the pecking order theory proposed Stewart Myers of MIT, for financing needs, firms prefer to first tap internal sources such as retained profits and excess cash. : TRUE

ANY DOUBTS, FEEL FREE TO ASK