2. Factors that affect the AFN equation

QUESTION: Several factors affect a firm's need for external funds. Evaluate the effect of each following factor and place a check next to each factor that is likely to increase a firm's need for external capitalthat is, its AFN (additional funds needed).Check all that apply.

A. The firm's inventory turnover decreases, with no effect on the sales forecast.

B. The firm improves its production system and increases its profit margin.

C. The firm's forecasted sales are unexpectedly increased.

QUESTION: Dividends to common shareholders are paid out of after-tax earnings. Do these payouts affect a firm's AFN?

A. Yes, dividends still affect a firm's AFN even though they are paid out of after-tax earnings.

B. No, dividends do not affect a firm's AFN, because they are paid out of after-tax earnings.