According to the pecking order theory, the issuance of debt often signals:

I. an undervalued stock;
II. an overvalued stock;
III. management confidence that the investment is profitable;
IV. management needs capital beyond what comes cheaply.

Correct Answer: I and III

On the other hand, the issuance of equity sends a negative signal that the stock is overvalued and that the management is looking to generate financing by diluting shares in the company.