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.?
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.
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