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Under Walter's Model, for a normal firm (r = Ke), dividend policy is:
AAlways 100% payout
BIrrelevant (value is independent of payout)
CAlways 0% payout
DRandom
Answer & Solution
Correct answer: B. Irrelevant (value is independent of payout)
1. When r = Ke, retained earnings and dividends yield the same return.
2. Share price stays the same regardless of payout ratio.
3. Dividend policy is irrelevant for a normal firm.
_Source: ICAI BoS CA Inter Paper 6A, Ch 8 "Dividend Decisions", §1 — Walter's Model_
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