5. The residual dividend model The residual dividead policy approuch to dividend pols is based on the theor thot o firm's optimal dividend distribution policy is a function of the firm's target capital structure, the investment opportunibes avolnble to the firm, and the moilobility ond cost of external capital, The firm makes distribubons baied on the residualearnings. Purple Hedgehog Foretry Group is expected to generote $140,000,000 in net income over the next vear. Purple Hedgehog Forestry's stoch holders expect it to maintain its long-run dividend payout ratio of sow of earnings. the firm wants to maimain iss current coptal structure of 60% debt and 40% equity, the maximum copital budget it can support with this year's xpectud oet income is