Final answer:
Reducing the payout ratio from 90% to 70% will decrease Jim's Espresso's need for net new financing, as more earnings are retained within the company to support its 10% expected sales growth.
Step-by-step explanation:
The change from a 90% payout ratio to a 70% payout ratio means that the company will now retain a larger portion of its net income for reinvestment into the business. This increase in retained earnings will reduce the net new financing needed, as the company will be self-funding more of its planned growth. Additionally, with sales expected to grow by 10% next year, this growth in retained earnings will contribute to the company's financial capital, further influencing the amount of external financing required.
If Jim's Espresso had planned on new investments for the additional sales, then the reduced payout ratio would mean more funds are available from net income to cover these investments. Therefore, the amount of external financing that would be required to support the 10% growth in sales would be lower than if the payout ratio remained at 90%.
By lowering the payout ratio, Jim's Espresso is effectively reducing its dividend payments to shareholders and increasing its internal funds available for reinvestment. This decrease in dividends increases the retained earnings, strengthening the company's equity position and potentially its ability to fund operations or expansion internally without relying as much on external financing options.