Which of the following is NOT an implication of the pecking order theory of capital structure?

Multiple Choice

• Firms may want to maintain a reserve of cash or unused borrowing capacity.

• Firms may fail to undertake positive-NPV projects if they would have to be financed with a new issue of equity.

• On average, a firms stock price drops when it announces an equity issue.

• More-profitable firms (all else equal) should have higher debt ratios.