Homework Answers
According to the Walter's Model , the price of a share depends upon the dividend distributed by the company. The assumptions followed by this model are-
- Retained Earnings are the only source of finance.
- The return that can be earned on new investments (r) is constant.
- Required rate of return by the shareholders is constant (Re).
Given these assumptions, the conclusions are-
CASE 1 : r > Re
The firm has positive NPV investment opportunities. It should not pay dividend.
CASE 2 : r < Re
The firm has negative NPV projects. Dividend payout ratio should be 100%.
CASE 3 : r = Re
The firm has zero (0) NPV projects. Dividend policy is irrelevant.
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