4. 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.

a.The firm was planning on expanding its production facility, but its management recently decided that the expansion was not necessary.

b.The firm increases its dividend payout ratio.

c.The firm switches its supplier for the majority of its raw materials. The new supplier offers less favorable credit terms and thus reduces the trade credit available to the firm, resulting in a reduction in accounts payable.

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 earning