In the Pecking Order Theory, which financing option is considered the last resort?

• A. Internal financing
• B. Debt
• C. External equity
• D. New equity

Answer: (D)

The key idea is the financing hierarchy described by the Pecking Order Theory: firms prefer funding that minimizes information gaps and costs. They first use internal funds (retained earnings). If those aren’t enough, they turn to debt, since it generally involves fewer signaling effects and lower flotation costs than issuing new equity. Only when debt and internal funds are insufficient or unattractive do they resort to external equity, which carries higher costs, potential market signaling concerns, and dilution of ownership. Because external equity (new equity) is the least preferred option, it is used only as a last resort. So the correct choice is new equity, which is the same as external equity.