Final answer:
An increase in forecasted sales is most likely to lead to an increase in the additional funds needed (AFN) as it indicates a need for more capital to support higher business activity level.
Step-by-step explanation:
The student has asked which factor is most likely to lead to an increase in the additional funds needed (AFN). The AFN is the amount of funding a company will need to operate and grow, given its existing capital structure, retention policy, and operations. An increase in forecasted sales is most likely to increase the AFN because it implies that the company will need more capital to support the new level of business activity. This need will arise from the requirements to invest in new assets such as inventory and accounts receivable, minus any spontaneous liabilities that occur with higher sales.
When a company is planning its financial requirements, it considers various factors such as projected sales growth, asset requirements, changes in liabilities, and desired capital structure. After accounting for the internally generated funds and retained earnings, if there is still a shortfall in meeting the financial needs, it is referred to as the AFN.
The AFN represents the amount of external financing required to bridge the gap between the internally generated funds and the total financial requirements of the company. This external financing can come in the form of debt financing (such as bank loans or issuing bonds) or equity financing (such as issuing new shares).
Calculating the AFN is an important aspect of financial planning as it helps the company determine its external financing needs and develop strategies to secure the required funds to support its growth and operations.