Page 365 - FM Integrated WorkBook STUDENT 2018-19

Capital structure

Pecking-order theory

In this theory there is no search for an optimal capital structure through a theorised
process. Instead it is argued that firms will raise new funds as follows:

 internally generated funds (already available, cheap)

 debt (less contentious than share issues, moderate issue costs)

 new issue of equity (could be perceived as a sign of problems, expensive)

Illustrations and further practice

Now try TYU question 4 from Chapter 18.

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