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The Effect of Dividend Payouts on Additional Funds Needed

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Which of the following statements is correct about the effect of the dividend payout ratio on the Additional Funds Needed (AFN)?

A. A smaller dividend payout means less retained earnings so AFN would decrease

B. A smaller dividend payout means more retained earnings so AFN would decrease

C. A smaller dividend payout means more retained earnings so the firm would automatically reduce long-term debt and have to increase AFN.

D. A smaller dividend payout means more retained earnings so AFN would increase.

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Solution Preview

The basic formula for Additional Funds Needed is AFN = Projected increase in Assets - Spontaneous increase in liabilities:

Any Increase in Retained Earnings. This is because additional funds are needed to ...

Solution Summary

This solution discusses the computation of Additional Funds Needed and the effect of changes in the dividend payout ratio on that amount.

$2.19