1. Factors that affect the AFN equation Several factors affect a firm\'s need fo
ID: 2792379 • Letter: 1
Question
1. Factors that affect the AFN equation 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
Question 1)
The correct answer is option 2 i.e. the firm increases its dividend payout ratio. The reason is if the firm don't retain its profits then in order to finance capex or Working capital they would need to borrow externally.
Question 2)
Option 2. Yes, dividends still affect a firm's AFN even though they are paid out of after-tax earnings. Please refer the above given reason for this option.
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