Question

Jefferson City Computers 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 sharp decrease in its forecasted sales.
		A switch to a just-in-time inventory system and outsourcing production that cuts inventory
		The company decreases its dividend payout ratio.
		The company starts to pay its suppliers sooner.

Answer 1

Option D. The company starts to pay its suppliers sooner.

A sharp decrease in forecasted sales would not lead to increase in AFN. A sharp increase on the other hand might lead to increase in AFN.

A switch to a just-in-time inventory system and outsourcing production that cuts inventory would allow producers to reduce the amount of inventory they hold, thus keeping their inventory costs down.

And a decrease in dividend payout ratio results in less cash outlay .