Which of the following events will cause a company's requirements for external financing to increase?
I. The dividend payout ratio increases.
II. The company changes its credit terms, increasing the time it gives customers to pay.
III. The company negotiates a lower price and longer terms with a major supplier.
IV. The retention ratio increases.
V. Increased competition forces the company to lower its prices.
A. III and IV.
B. II, IV and V.
C. II and V.
D. I, II, and V.
A. Negotiating a lower price and longer terms with a major supplier and increasing its retention ratio will both cause the company's requirements for external financing to decrease, not increase.
B. Increasing the retention ratio will cause the company's requirements for external financing to decrease, not increase.
C. These will cause the company's requirements for external financing to increase, but they are not the only events from among those listed that will have that effect.
D. These events will all cause the company's requirements for external financing to increase. When the dividend payout ratio increases, it means the company is paying out more of its net income in dividends and so it will have less retained earnings and cash available. When the company changes its credit terms to increase the time it gives customers to pay, this will cause accounts receivable to increase and collections and cash to decrease. Lower prices will decrease the profit margin and will decrease collections from sales, which will result in less cash available.
