AFN$=(\frac{A_0^{**}}{S_0})S-(\frac{L_0^{**}}{S_0})S-M_1(1-$ Payout $)$

The AFN equation shows the relationship of

$-$Select$-$

funds needed by a firm to its projected increase in assets, the spontaneous increase in

liabilities, and the increase in retained earnings. Rapidly growing companies require larger increases in assets; other things held constant, so

growth is an important factor to the firm's AFN. The

ratio is the ratio of assets required per dollar of sales. Companies with

higher assets$-$to$-$sales ratios require more assets for a given increase in sales, hence a

need for external financing.

funds arise out of normal business operations from its suppliers, employees, and the government that reduce the firm's need for external financing.

The

the profit margin, the larger the net income available to support increases in assets, hence the $[$

the need for external

financing. The

The higher the

ratio is the proportion of net income that is reinvested in the firm, and it is calculated as $1$ minus the

$.$

ratio, the lower the firm's AFN. The

growth rate is the maximum achievable growth rate without the firm

having to raise external funds. In other words, it is the growth rate at which the firm's AFN equals zero.