Dividend Policy

Walter model can be applied only to those companies which:
(a) Earn high profits.
(b) Make investment by resorting to high level of debts.
(c) Make investments without borrowing or raising external equity.
(d) Do not make any investment.

Ans is C. Can anyone explain me the logic behind it.?
Replies (2)
Quick Summary
The Walter Model helps understand how a company's dividend policy affects its share price. It suggests that when a company's return on investment (ROI) is greater than the cost of equity (Ke), retaining earnings and reinvesting them can increase shareholder value. Conversely, if ROI is less than Ke, paying out all profits as dividends is generally better for investors. The model assumes companies invest without external borrowing or equity, which is key to its application.

Walter model is one of my favourites and it makes me like a Tycoon

 

1. When ROI > Ke Here the firm made profits which can cover up the shareholders payback. But the company wants to retain it further one more year or more, reinvest it back and give the investors more money as a return. The returns the company is promising is more than the returns an investor could get if he invests with his dividend income. Here Dividend payout is 0%

2. When ROI=Ke Here the firm declares 0-100% dividend payout because if the firm has a chance to double the returns, it will retain it, or else, if the investor can earn it, it will allow them to do so. Depending upon the reinvestment criteria without raising additional funds, it will declare dividends.

3. When ROI < Ke Here, Since the firm is not doing well, it will declare 100% dividend payout because the investor has better chances of investing it somewhere else. 

 

 

Mr. Karan, sorry here R=IRR. The book I’m referring to had printed it as ROI. IRR = 0 NPV while, Ke can have 0 NPV, +ve NPV or Negative NPV. (There can be a negative IRR as well if there are unconventional Cashflows). Walter assumed ‘r’ at different rates and also assumed Ke t different to simulate in his model to see if these values will increase or decrease in the share price along with increase decrease in dividend payout ratio. He found out both of them are inverselyrelated.

When R>Ke, With increase in dividend payout ratio, the market price of share is falling.

When R<Ke, With increase in dividend payout ratio, the market price of share is increasing.

When R=Ke, The market price of share is constant with increasing dividend payouts.

The problem here, it is assumed that this model is used for only all equity companies which has no debt.

The next problem is IRR is constant. 

Leave a Reply

Your are not logged in . Please login to post replies

Click here to Login / Register  

Company
28 August 2026
Audit Manager

K A R M & CO

Mumbai

CMA

View Details
Company
ARTICLESHIP 17 August 2026
Article Assistant

K R Kiran Kumar & Associates

Bengaluru

CA Inter

View Details
Company
ARTICLESHIP 25 August 2026
CA Article's

Saini Pati Shah & Co LLP

Mumbai

CA Inter

View Details
Company
25 August 2026
Senior Accountant

MG Associates

New Delhi

CA Inter

View Details
Company
ARTICLESHIP 08 August 2026
Article Assistant

Sanath Sheshagiri & Co.

Bengaluru

CA Inter

View Details
Company
ARTICLESHIP 29 August 2026
Article Assistant

RRPM & ASSOCIATES LLP

Chennai

CA Inter

View Details
Company
19 August 2026
PAID ARTCILE ASSISTANT

My Legal Tax Consultants Pvt. Ltd.

Noida

CA Inter

View Details
Company
11 August 2026
Manager / Senior Manager - Statutory Audit

CommerceCareer

New Delhi

CA

View Details