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Pecking Order Theory ranks financing in order of:
AExternal equity → Debt → Internal funds
BDebt → Equity → Internal funds
CEquity → Internal funds → Debt
DInternal funds → Debt → External equity
Answer & Solution
Correct answer: D. Internal funds → Debt → External equity
1. Pecking Order: Internal funds (retained earnings) → Debt → External equity.
2. Based on asymmetric information: managers know more than investors.
3. Issuing equity signals over-valuation, hence used as last resort.
_Source: ICAI BoS CA Inter Paper 6A, Ch 5 "Financing Decisions — Capital Structure", §2 — Theories_