Need help with my Business question – I’m studying for my class.
hi everyone i want you to write your opinion about this topic ::
“1) “What does it mean if the EFN is negative.”
2) “What should a firm do if the EFN is negative?”
you have to write your won ideas 450 word
and then response to comments
this is the first response:
When an EFN is negative, it means there is surplus capital. It means that the retained earnings and spontaneous liabilities exceeded the additional assets needed. It is implied that the company can either distribute greater dividends, or pay off its liabilities and take the additional finance in the form of liabilities. This is because EFN (or AFN) represents financing in the form of retained earnings or additional liabilities.
EFN stands for External Financing Needed. If the EFN is negative it means the company does not need external financing. It has a surplus of assets. If the EFN is negative a firm should 1) Pay off its liabilities 2) Reinvest in retained earnings for growth of the firm 3) and/or pay higher dividends.
3th response :
I agree with much of what you said. However, I think it is useful to look at the equation to look at the key assumptions behind the EFN analysis to know why the EFN might be negative. Besides each type of asset (A*) growing proportionally with rental income, operation could be at full capacity, Profit margin and dividends pay out will be maintained, increase in expected rental income, and increase in account payables. Assumptions 1,2 and 3 might not be necessarily realistic in real life. So, negative EFN might not be negative because of having a surplus of assets.
let me know if you have any qustion