Question
How do predictions for leverage by profitable firms differ under the pecking order theory and the static theory?
Multiple choice question.
Pecking theory predicts no leverage while static theory predicts 100% leverage
Both theories predict equal leverage for profitable firms
Pecking order theory predicts that profitable firms will use less leverage.
Pecking order theory predicts that profitable firms will use more leverage.
Multiple choice question.
Pecking theory predicts no leverage while static theory predicts 100% leverage
Both theories predict equal leverage for profitable firms
Pecking order theory predicts that profitable firms will use less leverage.
Pecking order theory predicts that profitable firms will use more leverage.
Answers
GPT-4o mini
The correct choice is:
**Pecking order theory predicts that profitable firms will use less leverage.**
Under the pecking order theory, profitable firms prefer to use internal funds (retained earnings) for financing before resorting to debt, which leads to lower leverage. In contrast, the static theory suggests that firms choose an optimal capital structure that may involve a higher level of leverage based on benefits and costs.
**Pecking order theory predicts that profitable firms will use less leverage.**
Under the pecking order theory, profitable firms prefer to use internal funds (retained earnings) for financing before resorting to debt, which leads to lower leverage. In contrast, the static theory suggests that firms choose an optimal capital structure that may involve a higher level of leverage based on benefits and costs.