Question

Which one of the following assumptions is not covered in the Walter's Model of the dividend policy?

• A. All financing is done through retained earnings
• B. Firm's business risk does not change due to additional investments
• C. The firm has an infinite life
• D. The key variables like EPS and DPS keep on changing

Answer 1

Answer: (D)

The key variables like EPS and DPS keep on changing

Assumptions of Walter's Model of the dividend policy include:

• Financing of the company's requirements is done through the retained earnings, with no external financing.
  
• The rate of return (r) and the cost of capital (K) remain constant irrespective of any changes in the investments.
  
• The earnings per share (EPS) and Dividend per share (DPS) remains constant.
  
• The firm has a perpetual life.