F.Marston,Inc.has developed a forecasting model to estimate its AFN for the upcoming year.All else being equal,which of the following factors is most likely to lead to an increase of the additional funds needed (AFN)?
A) A switch to a just-in-time inventory system and outsourcing production.
B) The company reduces its dividend payout ratio.
C) The company switches its materials purchases to a supplier that sells on terms of 1/5, net 90, from a supplier whose terms are 3/15, net 35.
D) The company discovers that it has excess capacity in its fixed assets.
E) A sharp increase in its forecasted sales.

Question

Quizplus · Accepted Answer

Answer e is obviously correct.A switch to a just-in-time inventory system and outsourcing production would lower the firm's capital intensity ratio,which would lower AFN.Note that with purchase terms of 1/5 net 90,the nominal cost of non-free trade credit is only 4.34%,whereas with 3/15,net 35,the nominal cost of trade credit is over 56%.Therefore,the firm should have been taking discounts originally,hence should have had few accounts payable,whereas it would probably not take discounts and thus have more accounts payable with the new supplier.That change would lower its AFN.

FMarston,Inc