Suppose a firm makes the following policy changes. If the change means that external nonspontaneous financial requirements (AFN) will increase, indicate this with a (); indicate a decrease with a (); and indicate an indeterminate or negligible effect with a (0). Think in terms of the immediate short-run effect on funds requirements.
Problems 16-1 AFN EQUATION Carlsbad Corporation's sales are expected to increase from $5 million in 2016 to $6 million in 2017, or by 20%. Its assets totaled $3 million at the end of 2016. Carlsbad is at full capacity, so its assets must grow in proportion to projected sales.
At the end of 2016, current liabilities are $1 million, consisting of $250,000 of accounts payable, $500,000 of notes payable, and $250,000 of accrued liabilities. Its profit margin is forecasted to be 3%, and the forecasted retention ratio is 30%.
Use the AFN equation to forecast the additional funds Carlsbad will need for the coming year.
a. The dividend payout ratio is increased.
b. Rather than produce computers in advance, a computer company decides to produce them only after an order has been received.
c. The firm decides to pay all suppliers on delivery, rather than after a 30-day delay, to take advantage of discounts for rapid payment.
d. The firm begins to sell on credit. (Previously, all sales had been on a cash basis.)
e. The firm's profit margin is eroded by increased competition; sales are steady.
f. Advertising expenditures are stepped up.
g. A decision is made to substitute long-term mortgage bonds for short-term bank loans.
h. The firm begins to pay employees on a weekly basis. (Previously, it had paid employees at the end of each month.)