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25 June, 14:35

A company expects sales to increase during the coming year, and it is using the AFN equation to forecast the additional capital that it must raise. Which of the following conditions would cause the AFN to increase? (A) The company previously thought its fixed assets were being operated at full capacity, but now it learns that it actually has excess capacity. (B) The company increases its dividend payout ratio. (C) The company begins to pay employees monthly rather than weekly. (D) The company's profit margin increases. (E) The company decides to stop taking discounts on purchased materials.

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  1. 25 June, 17:12
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    (B) The company increases its dividend payout ratio.

    Explanation:

    AFN is Additional Funds needed.

    For this Additional Funds needed = Expected or projected increase in assets - Expected increase in liabilities - Expected increase in retained earnings.

    As with the payment of dividend the retained earnings tend to reduce, therefore with increase in dividend payout ratio there will be decrease in expected increase in retained earnings.

    Which will further increase the AFN.

    Therefore, the correct answer is

    (B) The company increases its dividend payout ratio.
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