ABC Corp. has a target debt-to-equity structure of 25/75.Management has decided on a capital budget of $1.4 million for next year. Sales are forecasted at $18 million, with a net margin of 8.8%. Management strictly follows a residual distribution model and pays all distributions as dividends.

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1. What will ABC's dividend payout be?

1. Discuss the primary disadvantage of residual distribution models.

1. What advice would you give to management on how to determine the optimal dividend policy?