Which statement is MOST CONSISTENT with pecking order theory?

Multiple Choice

• Internally generated capital via retained earnings are beneficial to the firm because it signals that the firm will need to issue more equity. More outstanding shares of stock is beneficial to equity owners.

• Firms are concerned about issuing more debt rather than equity due to adding a higher risk of default and higher costs of capital.

• A firm should focus on growth by issuing equity since this is the most risky to the investor, but least risky to the firm itself and therefore is a better choice for the business over the long term.

• Firms should be careful when raising new equity because this potentially suggests the firm believes that the stock is overvalued