Which one of the following assumptions is not covered in the Walter’s Model of the dividend policy ?
The key variables like EPS and DPS keep on changing.
Walter’s model holds that dividend policy affects the value of the share, depending on the relation between the firm’s internal rate of return \( r \) and its cost of capital \( k \): \( P = \dfrac{D + \frac{r}{k}(E - D)}{k} \).
Its assumptions are: all financing is done through retained earnings (no new equity or debt); \( r \) and \( k \) remain constant, which means additional investments do not change the firm’s business risk; earnings are either fully distributed or fully reinvested at once; the firm has an infinite (perpetual) life.
The model further assumes that the beginning earnings per share (EPS) and dividend per share (DPS) are given and remain constant; the formula values a constant stream of dividends and retained earnings. Different values of DPS are tried only to find the optimum payout, not because they change over time.
So the claim that EPS and DPS keep on changing contradicts the model rather than being one of its assumptions.
Hence, The key variables like EPS and DPS keep on changing.
Similar Questions
Which one of the following assumptions is not included in the James E. Walter Valuation model ?
“Dividend is not relevant in determining the value of the company”. Who among the following held this opinion ?
Who formulated the following model for estimating the market price of equity share ?
\(P = \frac{D + \frac{R_a}{R_c}(E - D)}{R_c}\)
Where, P = Market price of equity share
D = DPS
E = EPS
E – D = Retained earning per share
Ra = Internal rate of return on investment
Rc = Cost of capital
Dividend capitalisation model was developed by
In case, cost of capital is 10%, EPS ₹ 10, IRR 8% and Retention Ratio is 60%, then the value of equity share as per Gordon’s Model will be :
Important Questions from Dividend decision
Declared and paid dividend Rs. 7,00,000 is
Which of the following assumptions form the basis of the MM Hypothesis in stating irrelevance of capital structure regarding the weighted average cost of capital remaining constant?
(A) Perfect capital markets
(B) Heterogenous risk class
(C) Absence of taxes
(D) Full dividend payout
(E) Same expectation of firm's EBIT with which to evaluate the value of a firm
Choose the correct answer from the options given below
The formula \(P_0=\frac{D}{K}+\frac{\frac{R}{K}(E-D)}{K}\) (Where P0 is market price of shares, E is earning per share, D is dividend per share, R is rate of Return and K is cost of equity) for determining the dividend of the firm has been given by: :
Given below are two statements, one labelled as Assertion (A) and the other labelled as Reason (R). Read the statements and choose the correct answer using the code given below.
Assertion (A): As per M-M hypothesis the value of the levered firm is equal to the value of the unlevered firm.
Reason (R): The process of arbitrage becomes applicable in such situations.
- The earning per share for Avanti corporation is Rs. 4.0. The rate of return on investments is 16 per cent and the return required by its shareholders is 12 percent. What will be the price per share as per the Walter model, if the payout ratio is 40 per cent?
