Question

The term "additional funds needed (AFN)" is generally defined as follows:

a. Funds that a firm must raise externally from non-spontaneous sources, i.e., by borrowing or by selling new stock to support operations.

b. The amount of assets required per dollar of sales.

c. A forecasting approach in which the forecasted percentage of sales for each balance sheet account is held constant.

d. Funds that are obtained automatically from routine business transactions.

e. The amount of internally generated cash in a given year minus the amount of cash needed to acquire the new assets needed to support growth.

A company expects sales to increase during the coming year, and it is using the AFN equation to forecast the additional capital that it must raise. Which of the following conditions would cause the AFN to increase?

a. The company begins to pay employees monthly rather than weekly.

b. The company's profit margin increases.

c. The company increases its dividend payout ratio.

d. The company previously thought its fixed assets were being operated at full capacity, but now it learns that it actually has excess capacity.

e. The company decides to stop taking discounts on purchased materials.

Answer 1

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Answer:

1)

Funds that a firm must raise externally from non-spontaneous sources, i.e., by borrowing or by selling new stock, to support operations. (Option A)

Other options are incorrect as they are not the amount of internally generated cash in a given year minus the amount of cash needed to acquire the new assets needed to support growth, and  the amount of assets required per dollar of sales.

2)

The company increases its dividend payout ratio.