4. The residual dividend model The residual dividend policy approach is based on the theory that a company's optimal distribution policy is a function of its target capital structure, the investment opportunities available to the firm, and the availability and cost of its external capital. The firm makes distributions to its shareholders based on its residual earnings Consider the following example: Globo-Chem Corporation is expected to generate $2,200,000 in net income over the next year. Globo-Chem Corporation's stockholders expect it to maintain its long-run dividend payout ratio of 40.00% of earnings. If Globo-Chem wants to maintain its current capital structure of 60% debt and 40% equity, the maximum capital budget it can support with this year's expected net income is shareholders based on its residual earnings. Unu de avaliability and cost o Consider the following example: Globo-Chem Corpord $2,640,000 ed to generate $2,200,000 in net income over the ne expect it to maintain ividend payout ratio of 40.00% of earnings. $3,300,000 $3,465,000 If Globo-Chem wants to $3,630,000 Jurrent capital structure of 60% debt and 40% equity. expected net income is