The pecking order theory of capital structure rests on an assumption of:
1. Agency costs
2. Barriers to entry
3. Asymmetric information
4. Tax shields cost of financial distress
Methods of Financing:
Financing is a way of obtaining resources to facilitate the production process. There are various sources that a firm can obtain capital or resources. These sources include:
- Obtaining a loan from financial institutions.
- Internal sources of finances e.g retained earnings.
Answer and Explanation:
The correct answer is (3) Asymmetric information
According to the pecking order theory, the cost of financing business activity is influenced by asymmetric information. In specific, this theory postulates that the cost of finances increases with asymmetric information. Therefore, pecking order theory rest on assumption of asymmetric information. For this reason, the firm will prefer internal sources of capital before outsourcing capital.
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Learn more about this topic:
from Corporate Finance: Help & ReviewChapter 8 / Lesson 7