WHAT DO FIRMS LOOK AT IN FINANCING?
A. Is there a financing hierarchy? * Argument There are some who argue that firms follow a financing hierarchy, with retained earnings being the most preferred choice for financing, followed by debt and that new equity is the least preferred choice. * Rationale Managers value flexibility and control. To the extent that external financing reduces flexibility for future financing (especially if it is debt) and control (Bonds have covenants; New equity attracts new stockholders into the company and may reduce insider holdings as a percentage of total holding), managers prefer retained earnings as a source of capital. * Preference rankings long-term finance: Results of a survey Ranking Source Score 1 Retained Earnings 5.61 2 Straight Debt 4.88 3 Convertible Debt 3.02 4 External Common Equity 2.42 5 Straight Preferred Stock 2.22 6 Convertible Preferred 1.72 5. You are reading the Wall Street Journal and notice a tombstone ad for a company, offering to sell convertible preferred stock. What
