Question

Debt may be the preferred form of external financing for many firms because:

Multiple Choice

A. debt will not adversely affect the firm's financial ratios.

B. equity issuance is considered by investors to be a negative signal.

C. most firms already have too much equity.

D. tax rates on equity are lower.

I believe the answer is A, but I am second guessing myself.

Answer 1

Debt may be preferred form of external financing for many firms because investors think that taking equity assistance is a negative signal. As per Pecking order theory, firms which are less profitable borrow because they have insufficient funds and also to avoid fall in share price.

Hence the correct option is B.