Question

How will the following affect the amount of external funds needed by a company? Explain.

Excess capacity

Economies of scale

A decrease in days sales outstanding

An increase in profit margin

An increase in the retention ratio

Briefly discuss the potential limitations with ratio analysis and additional qualitative factors that analysts will consider beyond ratios when evaluating a company.

Discuss five corporate governance provisions that are internal and under the firm’s control.

Answer 1

As per rules I will answer the first 4 sub parts of the question

1: If the firm has excess capacity it can use that rather then buying fixed assets to supplement the increase in sales. So the EFN will be lower.

2: Economies of scale: Due to higher economies of scale, the fixed costs will not increase in the same proportion as sales.So the EFN will be lower.

3: A decrease in days sales outstanding : This implies that the number of days in which the customers pays the money reduces. So this will churn the funds faster and EFN will be lower.

4: An increase in profit margin: This will mean that the costs are lesser in proportion to the sales. This will result in more revenues and lesser costs thus reducing the EFN.