CS Executive · Corporate Accounting and Financial Management · Dividend Decisions
Which of the following is an assumption of Walter's model?
Walter's model assumes the firm finances all new investments entirely through retained earnings, with no external debt or equity. It also assumes constant r and k, constant EPS and DPS, and an infinite firm life.
- AThe firm finances all investments through retained earnings only, with no new external debt or equityCorrect
- BThe firm's cost of capital changes as the dividend payout changes
- CThe firm has a finite life with varying r
- DReturn on investment is a function of the amount retained
Explanation
Walter assumes all financing is by retained earnings, with r and k constant, 100% internal financing, constant EPS and DPS, and an infinite life. Options stating that k varies or r varies with retention contradict the model's constant r and k assumptions.
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