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According to Gordon's Model, for a declining firm (r < Ke), optimal payout is:
A100%
B50%
C0%
DDoesn't matter
Answer & Solution
Correct answer: A. 100%
1. Declining firm: r < Ke. Retained earnings earn LESS than the cost of capital.
2. Hence shareholders are better off receiving the cash as dividends.
3. Optimal payout = 100%.
_Source: ICAI BoS CA Inter Paper 6A, Ch 8 "Dividend Decisions", §1 — Gordon's Model_