Distributing the dividends and retaining the earnings, Financial Management

Assignment Help:

The Walter's model, thus relates the question of distributing the dividends and retaining the earnings to the investment opportunities that are available with the firm.

(i) If a firm has sufficient profitable investment opportunities it will be able to earn more than what the investors expect as r> Ke that is return on investment is more than the cost of capital. Such firms are described the growth firms. For growth firms the best possible dividend policy would be given by Dividend Payout Ratio of zero that is they would retain their entire earnings. The market worth of the shares will be maximized as a result.

(ii) On the contrary if a firm doesn't have profitable investment opportunities that are when r is less than Ke the shareholders will be better off if the earnings are paid out to them consequently that they are able to earn a higher return by investing the funds elsewhere. In such a case the market cost of shares will be maximised by the distribution of the entire earnings as dividend. For such firms the best possible dividend policy would be given by Dividend Payout Ratio of 100%.


Related Discussions:- Distributing the dividends and retaining the earnings

What is current asset, Q. What is Current Asset? Current Asset - ASSET ...

Q. What is Current Asset? Current Asset - ASSET which one can reasonably expect to convert into cash, sell or consume in operations within a single operating cycle or within a

Tokyo stock exchange, Tokyo Stock Exchange In the 1870s, a securities s...

Tokyo Stock Exchange In the 1870s, a securities system was introduced in Japan and public bond negotiations began. This resulted in a demand for public trading institution, whi

Introduction to financial management, Introduction to financial management:...

Introduction to financial management: Meaning and defecation of the financial management Finance function Scope and content of financial function Functions and

Calculate the required return - maintenance & other expense , An asset need...

An asset needed by the ABC Corp. can be purchased for $100,000.  Maintenance and other ownership expenses will total $20,000 each year for the asset's expected 10-year life. On the

What are the factors of debt securities, What are the factors of debt secur...

What are the factors of debt securities A legal agreement, known as a trust deed, is drawn between security holders and company issuing the debt securities. Every security issu

What do you signify by cost of capital, Q. What do you signify by Cost of C...

Q. What do you signify by Cost of Capital? What do you signify by 'Cost of Capital'? What is its meaning and what are the problems in determination of cost of capital? Ans.

Define the term- mergers and takeovers, Define the terms- Mergers and takeo...

Define the terms- Mergers and takeovers The terms takeovers and mergers are inter-related. When a company attains the majority of shares of another company, acquired company is

Option adjusted spread, The formula explained in the above paragraph ...

The formula explained in the above paragraph enables the investor to compute the value of a bond with an embedded option as the difference between the value of an

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd