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​Jim's Espresso expects sales to grow by 9.5 % next year and interest expense will remain constant.​ Jim's changes its payout ratio from 90 % to 79 % of net income next year. When the payout ratio was 90 %​, there was excess financing in the amount of $ 3 comma 884. ​Jim's developed the pro forma financial statements provided below to reflect the change in the payout ratio to 79 %. How will the net new financing​ change?
LOADING... ​(Click the icon to view the pro forma income​ statement.)
LOADING... ​(Click the icon to view the pro forma balance​ sheet.)
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Part 1
​Hint: Determine the difference in financing by subtracting the financing required at 90 %​, $ 3 comma 884​, from the financing required at 79 %.
The financing required at 79 % is ​$
  
enter your response here

To determine how the net new financing changes with the change in payout ratio from 90% to 79%, we need to calculate the retained earnings based on the new payout ratio, and then compare it to the previously required financing at 90% (which is $3,884).

### Step-by-step approach:

1. **Net Income Calculation**:  
   From the pro forma income statement:
   - Net Income = $67,183.

2. **Payout Ratios**:  
   - At 90% payout ratio, the dividends paid = 90% × $67,183 = $60,464.7, and retained earnings = 10% × $67,183 = $6,718.3.
   - At 79% payout ratio, the dividends paid = 79% × $67,183 = $53,077.57, and retained earnings = 21% × $67,183 = $14,105.43.

3. **Financing Requirements**:  
   - The previously required financing (at 90% payout ratio) is $3,884.
   - To find the financing at 79% payout ratio, we subtract the new retained earnings from the total financing needed.

4. **Difference in Retained Earnings**:  
   The difference in retained earnings between the two payout ratios:
   \[
   14,105.43 - 6,718.3 = 7,387.13
   \]

5. **Financing Difference**:  
   Now, subtract the previously required financing of $3,884 from the new retained earnings difference:
   \[
   \text{New Financing} = 3,884 - 7,387.13 = -3,503.13
   \]

This means that the financing required at 79% payout ratio decreases by approximately $3,503.13 compared to the financing at 90% payout ratio.

### Conclusion:
The financing required at the 79% payout ratio is negative $3,503.13, which means **no new financing is needed**, and there is excess financing available.

Would you like more details on this calculation or have any questions?

Here are 5 follow-up questions:
1. How is retained earnings affected by changes in payout ratios?
2. What does it mean when the financing requirement is negative?
3. How would different interest expenses impact the financing requirement?
4. How does an increase in sales impact the overall financial outlook?
5. How would a higher income tax rate affect the company's retained earnings?

**Tip**: Monitoring your payout ratio and retained earnings is crucial to managing internal financing needs effectively.

Jim's Espresso expects sales to grow by 9.5% next year and interest expense will remain constant. Jim's changes its payout ratio from 90% to 79% of net income next year. When the payout ratio was 90%, there was excess financing in the amount of $3,884. Jim's developed the pro forma financial statements provided to reflect the change in the payout ratio to 79%. How will the net new financing change?

Calculate how Jim's Espresso's financing changes when the payout ratio drops from 90% to 79%. Use formulas to compute dividends, retained earnings, and financing requirements. Explore key business finance concepts such as net income, retained earnings, and financing requirements.

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