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Question
A view that the dividend policy of a firm has a bearing on share valuation advocated by James E. Walter is based on which one of the following assumptions?
A view that the dividend policy of a firm has a bearing on share valuation advocated by James E. Walter is based on which one of the following assumptions?
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Solution
The correct option is A Retained earnings is only source of financing
Walter’s model on dividend policy states about the relevance concept of a dividend. The concept lays down that a dividend decision of the company affects its valuation. The companies paying higher dividends have more value as compared to the companies that pay lower dividends or that do not pay at all. Walter’s theory uses certain assumptions and one of such assumptions is that all the company's investments are financed through retained earnings.Thus a dividend policy of a firm has a bearing on share valuation based on this assumption.
Walter’s model on dividend policy states about the relevance concept of a dividend. The concept lays down that a dividend decision of the company affects its valuation. The companies paying higher dividends have more value as compared to the companies that pay lower dividends or that do not pay at all. Walter’s theory uses certain assumptions and one of such assumptions is that all the company's investments are financed through retained earnings.
Thus a dividend policy of a firm has a bearing on share valuation based on this assumption.
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