6. Factors that affect the AFN equatiorn Aa Aa Several factors affect a firm\'s

Question

6. Factors that affect the AFN equatiorn Aa Aa Several factors affect a firm's need for external funds. Evaluate the effect of each following factor and place a check next to each factor that is likely to increase a firm's need for external capital-that is, its AFN (additional funds needed). Check all that apply. The firm previously thought its fixed assets were being operated at full capacity, but now it learns that it actually has excess capacity. Management has decided that the firm needs to keep more inventory on hand throughout the year. X The firm increases its dividend payout ratio. Tolbotics Inc. has seen its profit margin eroded by increased competition over the last year, but its sales have remained steady. Assuming everything else is held constant, will this affect the firm's AFN? No, the firm's AFN will not be affected, because the firm's sales remained constant. O Yes, the decrease in profit margin will affect the firm's AFN even though sales have remained constant.

Explanation / Answer

The second and third statements would result in higher AFN because higher need to working capital would lead to more financing needs and same applies for higher dividend payout as well.

The first statement is incorrect because the firm has excess capacity which could be utilized before external financing is needed.

Yes, AFN would be higher due to lower profit margin as the business earn less than in the past, leading to higher financing needs.

Related Questions

Navigate

• Browse (All)
• Browse 6
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.