The correct answer is D. The key variables like EPS and DPS keep on changing.
Walter’s model of dividend policy is a static model, which means that it assumes that the key variables like EPS and DPS do not change over time. However, in reality, these variables are constantly changing, which makes the model less accurate.
A. All financing is done through retained earnings. This assumption is made to simplify the model. In reality, firms can also finance their investments through debt or equity issuance.
B. Firm’s business risk does not change due to additional investments. This assumption is also made to simplify the model. In reality, a firm’s business risk can change due to a number of factors, such as changes in the industry, changes in the economy, or changes in the firm’s own operations.
C. The firm has an infinite life. This assumption is made to simplify the model. In reality, all firms have a finite life. However, this assumption is not critical to the model’s validity.
D. The key variables like EPS and DPS keep on changing. This assumption is not made in Walter’s model. As discussed above, this assumption is not realistic, which makes the model less accurate.