0% Payout
100% Payout
50% Payout
25% Payout
Answer is Right!
Answer is Wrong!
The correct answer is A. 0% Payout.
The Walter’s Model is a model that determines the optimal dividend payout ratio for a firm. The model states that the optimal dividend payout ratio is
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0% when the firm’s cost of equity (ke) is greater than the firm’s required rate of return (r). This is because the firm can earn a higher return on its investment by reinvesting its earnings than it can by paying out dividends.
Option B is incorrect because it would result in the firm paying out more dividends than it can afford. This would lead to the firm having a negative cash flow, which could put the firm in financial difficulty.
Option C is incorrect because it would result in the firm paying out too little dividends. This would not allow the firm to satisfy its shareholders’ expectations for dividends.
Option D is incorrect because it is not a possible payout ratio. The payout ratio must be between 0% and 100%.