The residual dividend policy approach to dividend policy is based on the theory that a firms optimal dividend distribution policy is a function of the firms 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 Red Bison Petroleum Producers Corporation:

Red Bison Petroleum Producers Corporation is expected to generate $180,000,000 in net income over the next year. Red Bison Petroleum Producerss stockholders expect it to maintain its long-run dividend payout ratio of 40% of earnings.

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 years expected net income is .