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A 100% retention policy is most appropriate for:
AA mature, low-growth firm
BA firm with no profits
CA declining firm
DA growth firm with r > Ke
Answer & Solution
Correct answer: D. A growth firm with r > Ke
1. Growth firm: r > Ke, so retained funds earn more than the cost of capital.
2. Reinvesting all earnings maximises shareholder wealth.
3. Aligns with Walter's & Gordon's growth-firm prescription.
_Source: ICAI BoS CA Inter Paper 6A, Ch 8 "Dividend Decisions", §1 — Walter & Gordon_
Related questions
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:According to Walter's Model, if r > Ke, the optimal dividend payout is:Walter's Model assumes the cost of capital (Ke) is: