If a firm's capital intensity ratio
$\left( \mathrm { A } _ { 0 } { } ^ { * } / \mathrm { S } _ { 0 } \right)$decreases as sales increase,use of the AFN formula is likely to understate the amount of additional funds required,other things held constant.

Question

If a firm's capital intensity ratio 
$\left( \mathrm { A } _ { 0 } { } ^ { * } / \mathrm { S } _ { 0 } \right)$decreases as sales increase,use of the AFN formula is likely to understate the amount of additional funds required,other things held constant.

Quizplus · Accepted Answer

The AFN (Additional Funds Needed) formula is designed to estimate the additional financing required by a firm as it increases its sales. If the capital intensity ratio decreases as sales increase, it implies that the firm is becoming more efficient in using its assets to generate sales. Therefore, the AFN formula, which factors in the capital intensity ratio, would more accurately or possibly overstate the additional funds needed, as it would anticipate a higher capital requirement based on historical capital intensity ratios.

If a Firm's Capital Intensity Ratio (A0∗/S0)\left( \mathrm { A } _ { 0 } { } ^ { * } / \mathrm { S } _ { 0 } \right)(A0​∗/S0​)

If a Firm's Capital Intensity Ratio $\left( \mathrm { A } _ { 0 } { } ^ { * } / \mathrm { S } _ { 0 } \right)$