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Question
Newbury Inc. has retained $2 million in earnings this year. It can borrow up $1.5 million at a rate of 8% and sell the same amount of new stock at a cost of 17%. Newbury cost of common equity without selling any new stock is 16%. If Newbury's capital budget is $2.5 million, pecking order theory says management will use:A) $1.5 million in debt and $1 million in retained earnings.
B) $2 million in retained earnings and $o.5 million in debt.
C) $833,333 each from retained earnings, new debt and new stock.
D) $1.5 million in debt and $1 million in new stock.
Answer
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