Page 83 - AFM Integrated Workbook STUDENT S18-J19

The financing decision

Further capital structure considerations

5.1 Static trade-off theory

 Static trade-off theory argues that firms in a stable (static) position will adjust
their current level of gearing to achieve a target level.

5.2 Pecking order theory

 Pecking order theory tries to explain why firms do not behave in the way the
static trade-off model would predict.

 It states that firms have a preferred hierarchy for financing decisions:

Internally

generated Debt finance New issue of
equity
funds

Illustrations and further practice

Now try TYU 1 from Chapter 4

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