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Fundamentals of Financial Manageme...

14th Edition
Eugene F. Brigham + 1 other
ISBN: 9781285867977

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BuyFindarrow_forward

Fundamentals of Financial Manageme...

14th Edition
Eugene F. Brigham + 1 other
ISBN: 9781285867977
Textbook Problem

Suppose a firm makes the following policy changes. If the change means that external non-spontaneous 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 for 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.

Summary Introduction

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.

Explanation

As the AFN increases, the sales of a company will increase that leads to increase in profit margin of the company...

b.

Summary Introduction

To identify: The effect of change in policy on AFN requirement when the AFN is decreased in this case.

c.

Summary Introduction

To identify: The effect of change in policy on AFN requirement when the AFN increases.

e.

Summary Introduction

To identify: The effect of change in policy on AFN requirement when the AFN increases.

f.

Summary Introduction

To identify: The effect of change in policy on AFN requirement when the AFN increase.

g.

Summary Introduction

To identify: The effect of change in policy on AFN requirement when there will be no effect on AFN.

h.

Summary Introduction

To identify: The effect of change in policy on AFN requirement when the AFN increase.

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