Question

All else being equal, which of the following factors is most likely to lead to an increase of the additional funds needed (AFN)?

a. A lower capital intensity ratio.
b. A lower dividend payout ratio.
c. A higher spontaneous-liabilities-to-sales ratio
d. A higher profit margin.
e. An increase in its forecasted sales.

Answer 1

The correct answer is E. An increase in forecasted sales is likely to lead to an increase in Additional Funds Needed (AFN), as the company would require additional funds to support the increased business activities.

Step-by-step explanation:

The most likely factor to lead to an increase in Additional Funds Needed (AFN) is an increase in forecasted sales. When a company forecasts an increase in sales, it typically needs additional funds to support the increased business activities. The other factors mentioned in the options do not directly impact the AFN calculation.

For example, a lower capital intensity ratio refers to a lower investment in fixed assets relative to sales, which may reduce the need for additional funds. A lower dividend payout ratio indicates that the company is retaining more earnings, potentially reducing the need for external funds. A higher spontaneous liabilities-to-sales ratio means the company relies more on its operations to finance its current liabilities, which may also reduce the need for additional funds. Lastly, a higher profit margin does not necessarily indicate a need for more funds unless it is accompanied by an increase in sales.