Allison's requires $180,000 to fund a new project next year. The firm expects to earn excess cash of $68,000 this year after all

Question

2 years ago

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Allison's requires $180,000 to fund a new project next year. The firm expects to earn excess cash of $68,000 this year after all

expenses, taxes, and dividends are paid. The firm can borrow up to $150,000 at 6.5 percent interest for up to ten years or, it can issue up to 25,000 new shares of stock that will have an estimated value of $35 a share at the end of this year. According to the pecking-order theory, how much will the firm raise in new equity capital to fund this project

Business

1 answer:

liraira [26] · Answer 1 · 2022-08-19T07:36:40+03:00

$0 is needed

<u>Explanation:</u>

As per pecking order theory the risks and consequently cost increases in the order of own cash reserves, debt and then fresh equity . Since own cash reserves and debt could take care of funding requirement, so according to the pecking order theory as studied, the fresh equity needed is $0, which means there is no requirement.

Therefore, there should be no equity capital that should be raised in order to fund the project.

The correct answer is $0 equity.