2. Factors that affect the AFN equation

Several factors affect a firms 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 firms need for external capitalthat is, its AFN (additional funds needed). Check all that apply.

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

The firm increases its dividend payout ratio.

The firms inventory turnover decreases, with no effect on the sales forecast.

Dividends to common shareholders are paid out of after-tax earnings. Do these payouts affect a firms AFN?

Yes, dividends still affect a firms AFN even though they are paid out of after-tax earnings.

No, dividends do not affect a firms AFN, because they are paid out of after-tax earnings.