The residual dividend model

The residual distribution policy approach to dividend policy is based on the theory that a firm's optimal dividend distribution policy is a function of the

firm's target capital structure, the investment opportunities available to the firm, and the availability and cost of external capital. The firm makes

distributions based on the residual earnings.

Consider the case of Purple Hedgehog Forestry Corporation:

Purple Hedgehog Forestry Corporation is expected to generate $$180,000,000$ in net income over the next year. Purple Hedgehog

Forestry has forecasted a capital budget of $$86,000,000,$ and it wishes to maintain its current capital structure of $70\%$ debt and $30\%$

equity.