Packing
order theory
Packing
order theory set a preference ranking for financing a project. These ranking or
preferences has been explained below;
1. No optimum level
Packing
order theory says that there is no optimum level of gearing for a company.
2. Retained Earnings is First Preference
Packing theory ranks Retained earnings as
first preference for the companies for new financing. There are two main
reasons for using retained earnings, simple and quick financing.
3. Debt Borrowing is Second preference
Packing
order theory says that debt borrowing is second preference due to cheaper cost
of debt than new share issue. Moreover, debt financing relatively less formal
than arranging equity finance.
4. New Issue is Last option
Packing
order theory says that new issue is last option for the organization. the
reason of being last preference is cost of issue, time consuming effort, and
require a lot of formalities.
