Reference no: EM132483808

Question 1) The following equation is sometimes used to forecast financial requirements:

AFN = (A0 */ S0) (ΔS) - (L0 */ S0) (ΔS) MS1 (1 - POR)

What key assumption do we make when using this equation? Under what conditions might this assumption not hold true?

Question 2) What is meant by the term "self-supporting growth rate?" How is this rate related to the AFN equation, and how can that equation be used to calculate the self- supporting growth rate?

Question 3) Suppose a firm makes the policy changes listed below. If a change means that external, nonspontaneous financial requirements (AFN) will increase, indicate this by a (+); indicate a decrease by a (-); and indicate no effect or an indeterminate effect by a (0). Think in terms of the immediate, short-run effect on funds requirements.

a. The dividend payout ratio is increased.

b. The firm decides to pay all suppliers on delivery, rather than after a 30-day delay, to take advantage of discounts for rapid payment.

c. The firm begins to offer credit to its customers, whereas previously all sales had been on a cash basis.

d. The firm's profit margin is eroded by increased competition, although sales hold steady.

e. The firm sells its manufacturing plants for cash to a contractor and simultaneously signs an outsourcing contract to purchase from that contractor goods that the firm formerly produced.

f. The firm negotiates a new contract with its union that lowers its labor costs without affecting its output.