The following equation can, under certain assumptions, be used to forecast financial requirements:

Under what conditions does the equation give satisfactory predictions, and when should it not be used?

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Suppose a firm makes the following policy changes. If the change means that external, nonspontaneous financial requirements (AFN) will increase, indicate this by a (); indicate a decrease by a (); and indicate indeterminate or no effect by a (0). Think in terms of the immediate, short-run effect on funds requirements.

a. The dividend payout ratio is increased.

b. The firm decides to pay all suppliers on delivery, rather than after a 30-day delay, to take advantage of discounts for rapid payment.

c. The firm begins to sell on credit (previously all sales had been on a cash basis).

d. The firm’s profit margin is eroded by increased competition; sales are steady.

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