1. Factors that affect the AFN equation Aa Aa Several factors affect a firm\'s n
ID: 2792606 • Letter: 1
Question
1. Factors that affect the AFN equation 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's inventory turnover decreases, with no effect on the sales forecast. The firm increases its dividend payout ratio. The firm previously thought its fixed assets were being operated at full capacity, but now it learns that it actually has excess capacity. Dividends to common shareholders are paid out of after-tax earnings. Do these payouts affect a firm's AFN? O No, dividends do not affect a firm's AFN, because they are paid out of after-tax earnings. O Yes, dividends still affect a firm's AFN even though they are paid out of after-tax earnings.Explanation / Answer
1) it will increase the funds required
Since inventory turnover ratio= Cost of goods sold/Avg inventory
If the ratio decreases means the inventory is increasing so we need external funds to buy the inventory with no effect on sales forecast
The firm increases dividend payout ratio means money is given out and will increase the need of external capital
No effect
so Option 1 and 2 effects
2)Yes it is affected
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