Question

5. Answer the following questions related to AFN. a. 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? What would be the more general formula for AFN? b. Name five key factors that affect a firm’s external financing requirements. Explain how each one affects the requirements? c. What is meant by the term “self-supporting growth rate”? How is this rate related to the AFN equation, and show how this equation calculates the self-supporting growth rate? d. Suppose a firm makes the following policy changes listed. If a change means that external, nonspontaneous financial requirements (AFN) will increase, indicate this by a (+); indicate a decrease by a (−); and indicate no effect or an indeterminate effect by a (0) and explain your reasoning. Think in terms of the immediate effect on funds requirements. i) The dividend payout ratio is increased. ii) The firm decides to pay all suppliers on delivery rather than after a 30-day delay to take advantage of rapid payment discounts. iii) The firm begins to offer credit to its customers, whereas previously all sales had been on a cash basis. iv) The firm’s profit margin is eroded by increased competition, although sales hold steady. v) The firm sells its manufacturing plants for cash to a contractor and simultaneously signs an outsourcing contract to purchase those contractor goods that the firm formerly produced. vi) The firm negotiates a new contract with its union that lowers its labor costs without affecting its output.

Answer 1

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