Question 34

Decrease its dividend payout ratio

To reduce its discretionary financing needed (DFN), Yellow Leaf Bookstore can decrease its dividend payout ratio. By retaining more earnings instead of distributing them as dividends, the company can lower its need for external financing.

A) Decrease its plowback ratio

Decreasing the plowback ratio would mean the company retains less of its earnings for reinvestment, which could actually increase the DFN. This option is counterproductive if the goal is to reduce financing needs.

B) Decrease its dividend payout ratio

Decreasing the dividend payout ratio allows the company to retain a larger portion of its profits. This retained earnings can be used for reinvestment or to cover expenses, effectively reducing the DFN because less external financing will be required.

C) Increase its average collection period

Increasing the average collection period would lead to slower cash inflows from accounts receivable, thereby increasing the DFN. This option would have the opposite effect of what is needed to reduce financing requirements.

D) Increase its sales growth

While increasing sales growth could potentially lead to higher revenues, it may also necessitate more financing if the growth requires additional investments in inventory, staff, or infrastructure. Thus, this option does not directly address the goal of reducing DFN.

Conclusion

Decreasing the dividend payout ratio is the most effective strategy for Yellow Leaf Bookstore to reduce its DFN, as it allows for greater retention of earnings. Other options either counteract the goal or do not effectively reduce the need for financing. By focusing on retaining earnings through a lower dividend payout, the company can improve its financial position more sustainably.