Which of the Following Statements Is Most Correct

question 2

Multiple Choice

Which of the following statements is most correct?

• A) Inherent in the AFN formula is the assumption that each asset item must increase in direct proportion to sales increases and that spontaneous liability accounts also grow at the same rate as sales.
• B) If a firm has positive growth in its assets, but has no increase in retained earnings, AFN for the firm must be positive.
• C) Using the AFN formula, if a firm increases its dividend payout ratio in anticipation of higher earnings, but sales actually decrease, the firm will automatically experience an increase in additional funds needed.
• D) Higher sales usually require higher asset levels. Some of the increase in assets can be supported by spontaneous increases in accounts payable and accruals, and by increases in certain current asset accounts and retained earnings.
• E) Dividend policy does not affect requirements for external capital under the AFN formula method.

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Definitions:

Fixed Input

Inputs used in production that cannot be varied in the short term, such as buildings or machinery.

Plant Size

The physical capacity or dimensions of a manufacturing facility.

Implicit Costs

They represent the opportunity costs of using resources that a company already owns, rather than the out-of-pocket expenses.

Economic Costs

The total cost of production, including both explicit costs like wages and materials and implicit costs such as opportunity costs.