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According to Walter's Model, if r > Ke, the optimal dividend payout is:
A100% payout
B50% payout
C0% payout (retain everything)
DDoesn't matter
Answer & Solution
Correct answer: C. 0% payout (retain everything)
1. Walter: when internal rate of return (r) > cost of equity (Ke), retention adds value.
2. A growth firm should retain all earnings (0% payout).
3. Conversely r < Ke ⇒ 100% payout; r = Ke ⇒ irrelevant.
_Source: ICAI BoS CA Inter Paper 6A, Ch 8 "Dividend Decisions", §1 — Walter's Model_
Related questions
A 100% retention policy is most appropriate for:A firm has EPS ₹5, Walter's r = 15%, Ke = 12%, payout 40%. Per Walter, share price is:For Walter's formula P = (D + (E − D) × (r/Ke)) / Ke, if D = E (100% payout):Under Walter's Model, for a normal firm (r = Ke), dividend policy is:A "Growth firm" under Walter's Model is one where:Walter's Model assumes the cost of capital (Ke) is: