Question

1. The following equation is sometimes used to forecast funding requirements:

   AFN= (A0*/S0)(S) – (L0*/S0)( S) – MS1(1- POR)
   What key assumption do we make when using this equation? Under what conditions might this assumption not hold true? What would be the more general formula for AFN?

2. Name five key factors that affect a firm’s external financing requirements. Explain how each one affects the requirements?

3. What is meant by the term “self-supporting growth rate”? How is this rate related to the AFN equation, and show how this equation be used to calculate the self-supporting growth rate?

Answer 1

1. Answer to the 1st Question:

Assume all the assets, sales, quick liablilities, profit margin, payout ratio remains constant.

General formula is the same as mentioned in the question

2. External Factors:

1. Payout ratio, Sales Ratio, Capital Intensity Ratio, Profit Margin, Days Sales Outstanding

3. Self Supporting Growth rate is maximum rate of growth that a company or social enterprise can sustain without without having growth to finance through debt or equity.