The pecking order states how financing should be raised In o

The pecking order states how financing should be raised. In order to avoid asymmetric information problems and misinterpretation of whether management is sending a signal on security overvaluation, the firm\'s first rule is to:

issue debt first.

always issue debt then the market won\'t know when management thinks the security is overvalued.

None of these.

issue new equity first.

finance with internally generated funds.

Solution

In order to avoid asymmetric information problems and misinterpretation of whether management is sending a signal on security overvaluation, the firm\'s first rule is to finance with internally generated funds.

The firms should avoid using external capital market and should finance the investment with the internally generated funds.