Question

If 'r' = '$k_e$', than MP by Walter's Model and Gordon's Model for different payout ratios would be ______________.

• A. Unequal
• B. Zero
• C. Equal
• D. Negative

Answer 1

The correct option is C Equal

RELATION OF DIVIDEND DECISION AND VALUE OF A FIRM

According to Walter’s theory, the dividend payout in relation to internal rate of return ‘r’ and (Cost of Capital) ‘k’ will impact the value of the firm in the following ways:

Relationship between r and k	Increase in Dividend Payout	Decrease in Dividend Payout
r>k	Value of the firm decreases	Value of the firm increases
r<k	Value of the firm increases	Value of the firm decreases
r=k	No change in the value of the firm	No change in the value of the firm