Delta Construction Inc. needs to raise $2 million for its new, positive NPV project. It has a line of credit approved from its bank for $3 million from which it can borrow the required amount. An investment bank has also contacted Delta stating that the market conditions will allow them to raise up to $5 million (or, if they prefer, a smaller issue such as $2 million) in new equity through a seasoned equity issuance. Finally, Delta earned $3 million this year of which about $2.5 million is available for investment. If the management of Delta strictly follow the Pecking Order model of capital structure, they will:

a.

Use $2 million from the available earnings to fund the project

b.

Raise the required $2 million as an equity issuance

c.

Borrow the required $2 million from the bank

d.

None of the other options is correct - the pecking order model is only for pure capital structure decision and cannot be related to projects.

e.

Distribute the required $2 million over all three options i.e. raise $0.67 million each from the bank, an equity issue, and available earnings