The residual dividend policy approach is based on the theory that a firm's optimal distribution policy is a function of the firm's target capital structure, the investment opportunities that the firm has, and the availability and cost of external capital. The firm makes distributions based on the residual earnings. Consider the following example: ABC Telecom Inc. is expected to generate $140 million in net income over the next year. ABC Telecom Inc. has forecasted a capital budget of $83 million, and it wishes to maintain its current capital structure of 70% debt and 30% equity. If the company follows a strict residual dividend policy and makes distributions in the form of dividends, what is its expected dividend payout ratio for this year? If ABC Telecom Inc. increases its debt ratio, its dividend payout ratio will assuming that all other factors are held constant. Globex Corp. has very stable, predictable earnings, but its capital investment tends to be lumpy. That means that its required capital budget usually is relatively low, but every few years some large expenditures cause the firm's capital budget to be quite large. Globex Corp. follow a strict residual dividend policy