Question

Which of the following statements is CORRECT? Select one: a. Higher sales usually require higher asset levels, and this leads to what we call AFN. However, the AFN will be zero if the firm chooses to retain all of its profits, i.e., to have a zero dividend payout ratio. b. If a firm's assets are growing at a positive rate, but its retained earnings are not increasing, then it would be impossible for the firm's AFN to be negative. c. Dividend policy does not affect the requirement for external funds based on the AFN formula method. d. Inherent in the basic, unmodified AFN formula are these two assumptions: (1) each asset item must grow at the same rate as sales, and (2) spontaneous liability accounts must also grow at the same rate as sales. e. If a firm increases its dividend payout ratio in anticipation of higher earnings, but sales and earnings actually decrease, then the firm's actual AFN must, mathematically, exceed the previously calculated AFN.

Answer 1

Answer:

b. If a firm's assets are growing at a positive rate, but its retained earnings are not increasing, then it would be impossible for the firm's AFN to be negative.

Explanation:

AFN represents Additional Funds Needed and that whenever a company plans for expansion it should have resources, generally these are borrowed from outside.

So when the firm is growing positively it have profits with it and simultaneously if there is no increase in retained earnings then it means the company is distributing such profits as dividends, and in that case there will be a positive balance of AFN as, the funds are still needed even in case of profits.

Thus, in no manner the balance of AFN will be negative in this instance.