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Fundamentals of Financial Manageme...
Fundamentals of Financial Manageme...
Suppose a firm makes the following policy changes. If the change means that external nonspontaneous financial requirements (AFN) will increase, indicate this with a (+); indicate a decrease with a (−); and indicate an indeterminate or negligible effect with a (0). Think in terms of the immediate short-run effect on funds requirements.
| a. The dividend payout ratio is increased. | __________ |
| b. Rather than produce computers in advance, a computer company decides to produce them only after an order has been received. | __________ |
| c. The firm decides to pay all suppliers on delivery, rather than after a 30-day delay, to take advantage of discounts for rapid payment. | __________ |
| d. The firm begins to sell on credit. (Previously, all sales had been on a cash basis.) | __________ |
| e.The firm’s profit margin is eroded by increased competition; sales are steady. | __________ |
| f. Advertising expenditures are stepped up. | __________ |
| g. A decision is made to substitute long-term mortgage bonds for short-term bank loans. | __________ |
| h. The firm begins to pay employees on a weekly basis. (Previously, it had paid employees at the end of each month.) | __________ |
a.
To identify: The effect of change in policy on AFN requirement when the AFN is increased as the dividend payout ratio increases.
Introduction:
Additional Fund Needed (AFN):
Additional fund needed is also known as external financing needed. It is the state in which a company needed finance to increase its operation. Additional fund needed is a method in which a company raises the funds through external resources to increase its assets, which would increase the sales revenue of the firm.
But according to additional fund needed method, a company do not change its financial ratio. Liabilities and retained earnings spontaneously increase with the increase in sales and assets.
As the AFN increases, the sales of a company will increase that leads to increase in profit margin of the company...
b.
To identify: The effect of change in policy on AFN requirement when the AFN is decreased in this case.
c.
To identify: The effect of change in policy on AFN requirement when the AFN increases.
e.
To identify: The effect of change in policy on AFN requirement when the AFN increases.
f.
To identify: The effect of change in policy on AFN requirement when the AFN increase.
g.
To identify: The effect of change in policy on AFN requirement when there will be no effect on AFN.
h.
To identify: The effect of change in policy on AFN requirement when the AFN increase.
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