7. Factors that affect the AFN equation Aa Aa Several factors affect a firm\'s n

Question

7. 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 forecasted sales are unexpectedly increased. The firm switches its supplier for the majority of its raw materials. The new supplier offers less favorable credit terms and thus reduces the trade credit available to the firm, resulting in a reduction in accounts payable. The firm was planning on expanding its production facility, but its management recently decided that the expansion was not necessary. 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

Part 1

The firm would require additional funds only in the second case i.e when its credit period is reduced due to which it will need to make payments earlier, leading to greater need for funds.

Part 2

Yes the dividend will affect Additional funds needed because if dividend is not distributed, it will be used by the company to invest in it's business activities and will not depend on external funds.

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