Explain the pecking order theory of capital structure

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Answer all the following parts of the question on capital structure theories.

a. Explain the pecking order theory of capital structure.

b. Alpha Corporation and Beta Corporation are identical in every respect except that Alpha is not levered. Beta Corporation pays 6% annual interest rate on its £1 million of outstanding debt. Financial information for the two firms appears in the table below. All earnings streams are perpetuities. After paying any interest on debt, both companies use all remaining free cash flows to pay dividends each year.
Assume perfect capital markets (No taxes or bankruptcy costs).

Reference no: EM133115305

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