Before learning pecking order theory of capital structure in company type business, please read our previous written other theories of capital structure :
1. Trade Off Theory of Capital Structure
2. Net Income, traditional and Modigliani and Miller Theory of Capital Structure
Pecking order theory of capital structure had been developed by Stewart C. Myers and Nicolas Majluf in 1984. Under this theory, main source of company's fund must be its own earned profit which should be reinvested in business activities. After this, company can raise debt and equity capital.
Why Did Stewart C. Nyers and Nicolas Majluf suggest this model of capital structure?
Both guys were so intelligent. They knew that debt and equity can use only if there is emergency or there is no profit from several years. But, if company uses his internal sources after paying interest and dividends, then no one can stop company from its progress. You can also apply its on your own small business.
Suppose, company is earning 30% on its total investment. At that time capital structure shows that 70% equity capital and 30% Debt. Company can save 20% after paying 10% interest and dividend and after doing this, company can reach 40% equity capital, 40% profit reinvested and 30% Debt. That will be good.
Testing of Pecking Order Predictions About Dividends and Debt
Prof. Eugene F. Fama of University of Chicago has tested pecking order theory and found that it will be effective for gaining high profit with low investment means high dividend payout.
1. Trade Off Theory of Capital Structure
2. Net Income, traditional and Modigliani and Miller Theory of Capital Structure
Pecking order theory of capital structure had been developed by Stewart C. Myers and Nicolas Majluf in 1984. Under this theory, main source of company's fund must be its own earned profit which should be reinvested in business activities. After this, company can raise debt and equity capital.
Why Did Stewart C. Nyers and Nicolas Majluf suggest this model of capital structure?
Both guys were so intelligent. They knew that debt and equity can use only if there is emergency or there is no profit from several years. But, if company uses his internal sources after paying interest and dividends, then no one can stop company from its progress. You can also apply its on your own small business.
Suppose, company is earning 30% on its total investment. At that time capital structure shows that 70% equity capital and 30% Debt. Company can save 20% after paying 10% interest and dividend and after doing this, company can reach 40% equity capital, 40% profit reinvested and 30% Debt. That will be good.
Testing of Pecking Order Predictions About Dividends and Debt
Prof. Eugene F. Fama of University of Chicago has tested pecking order theory and found that it will be effective for gaining high profit with low investment means high dividend payout.
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