he residual dividend policy approach to dividend policy is based on the theory that a firm's optimal dividend distribution policy is a function of the irm's target capital structure, the investment opportunities avalfable to the firm, and the avallability and cost of external capital, The firm makes distributions based on the residual earnings. Consider the case of Red Bison Petroleum Producers Group If the firm 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 If Red Bison Petroleum Producers Group reduces the amount of its forecasted capital budget, how will this affect the firm's annual dividend, assuming that all other factors are held constant? The amount that Red Bson Petroleum Producers Group will pay out in dividends this year will decrease. The amount that Red Bison Petroleum Producers Group will pay out in dividends this year will increase. Blue Guppie Seafood Corporation 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 vears some large expenditures cause the firm's capital budget to be quite iarge. Blue Guppie Seafood Corporation follow a strict residuat aividend policy