Pecking order theory states that, when financing new investment opportunities, a business will prefer to use:

1. Internal finance rather than external finance.

2. Equity rather than debt.

Which ONE of the following combinations (true/false) concerning the above statements is correct?

Antares Co and Sirius Co have identical business risk and operating characteristics. Antares Co has financial gearing and Sirius Co is entirely financed by equity. Both companies pay out all their profits in dividends but Antares Co earns twice as much profit before interest and tax as Sirius Co. Antares Co has equity with a market value of $34 million and debt with an equilibrium market value of $15 million. Sirius Co has equity with an equilibrium market value of $24 million. The tax rate is 20%.

According to Modigliani and Miller (with taxes), what is the predicted value of the equity of Antares Co?

The following comments were recently made, relating to methods of issuing shares by a public company:

1. An offer for sale is an invitation to the public to buy shares that are not yet in issue.

2. A placing is an invitation to selected investors to buy either new shares or shares already in issue.

Which ONE of the following combinations (true/false) is correct?