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246 Corporate Finance BRILLIANT’S

Table shows that, in Walter's model, the Cnamoº$ Q>o~c Xem©Vr h¡ {H$ dmëQ>g© _m°S>c _|, Am°pßQ>__
optimum dividend policy depends on the {S>{dS>oÝS> nm°{cgr, \$_© Ho$ B§Q>aZc aoQ> Am°\$ [aQ>Z© (r) Ed§
relationship between the firm's internal rate BgH$s H$m°ñQ> Am°\$ H¡${nQ>c (K) Ho$ _Ü` g§~§Y na {Z^©a
of return (r) and its cost of capital (K). Walter's
view on the optimum dividend-payout ratio H$aVr h¡& Am°pßQ>__ {S>{dS>oÝS>-noAmCQ> aoem| na dmëQ>g© Ho$
can be summarized as follows: Ñ{ï>H$moU H$mo g§jon _| Bg àH$ma àñVwV {H$`m Om gH$Vm h¡:
(i) Growth Firms (r > K): It can be seen from (i) J«moW \$åg© (r > K): Cnamoº$ Q>o~c _| `h XoIm Om
Table that the market value per share for the gH$Vm h¡ {H$ J«moW \$_© Ho$ {cE n«{V eo`a H$s _mH}$Q> d¡ë`y
growth firm is maximum (i.e. ` 150) when it _¡pŠO__ (AWm©V² ` 150) h¡, `{X \$_© 100% A{Zª½g
retains 100 percent earnings and minimum (i.e.
` 100) if it distributes all earnings. Thus, the gwa{jV aIo Ed§ {_{Z__ (AWm©V² ` 100) h¡ `{X dh g^r
optimum payout ratio for a growth firm is zero, A{Zª½g H$mo {S>pñQ´>ã`yQ> H$a XoVr h¡Ÿ& AV: EH$ J«moW \$_© Ho$
the market value per share P, increases as {cE Am°pßQ>__ noAmCQ> aoemo Oramo hmoJmŸ& O~ r > K h¡ V~
payout ratio declines when r > K. noAmCQ> aoemo KQ>oJm Ed§ n«{V eo`a H$s _mH}$Q> d¡ë`y P ~‹T>oJrŸ&
(ii) Normal Firms (r = K): It can be noticed (ii) Zm°_©c \$åg© (r = K): Cnamoº$ Q>o~c _| `h XoIm
from Table that the market value per share for Om gH$Vm h¡ {H$ Zm°_©c \$_© Ho$ {cE à{V eo`a H$s _mH}$Q>
the normal firm is same (i.e. ` 100) for different
d¡ë`y {d{^Þ {S>{dS>oÝS>-noAmCQ> aoemoO Ho$ {cE g_mZ (AWm©V²
dividend-pay out ratios. Thus, there is no
` 100) h¡Ÿ& AV:, Zm°_©c \$_© Ho$ {cE `hm± H$moB© `y{ZH$
unique optimum payout ratio for a normal
Am°pßQ>__ noAmCQ> aoem| Zht h¡Ÿ& EH$ {S>{dS>oÝS> nm°{cgr
firm. One dividend policy is as good as the
other. The market value per share is not affected AÝ` {OVZr hr AÀN>r h¡Ÿ& O~ r = K h¡ V~ à{V eo`a H$s
by the payout ratio when r = K. _mH}$Q> d¡ë`y noAmCQ> aoemo Ûmam à^m{dV Zht hmoJrŸ&
(iii) Declining Firms (r < K): It can be (iii) {S>ŠcmBqZJ \$åg© (r < K): Cnamoº$ Q>o~c _|
observed from table that, when the declining `h XoIm Om gH$Vm h¡ {H$ {S>ŠcmBqZJ \$_© H$m noAmCQ>
firm's payout ratio is 100 percent (i.e. zero aoemo O~ 100 à{VeV (AWm©V² gwa{jV Am` Zht) h¡ V~
retained earnings) the market value per share à{V eo`a H$s _mH}$Q> d¡ë`y ` 100 h¡ Ed§ O~ noAmCQ> aoemo
is ` 100 and it is ` 80 when payout ratio is
Oramo h¡ V~ _mH}$Q> d¡ë`y ` 80 h¡Ÿ& AV:, EH$ {S>ŠcmBqZJ
zero. Thus, the optimum payout ratio for a
declining firm is 100 percent. The market value \$_© Ho$ {cE Am°pßQ>__ noAmCQ> aoemo 100 n«{VeV h¡Ÿ& O~
per share P, increases as payout ratio increases r < K h¡ V~ noAmCQ> aoemo Ho$ ~‹T>Zo go à{V eo`a H$s _mH}$Q>
when r < K. d¡ë`y P ^r ~‹T>oJrŸ&
Thus, in Walter's model, the firm should AV:, dmëQ>g© _m°S>c _| `{X r > K hmo Vmo \$_© H$mo
use earnings to finance investments if r > K, AnZr A{Zª½g H$m Cn`moJ BZdoñQ>_oÝQ²>g H$mo \$m`ZoÝg H$aZo
should distribute all earnings when r < K and _| H$aZm Mm{hE, `{X r < K hmo Vmo Bgo g^r A{Zª½g H$mo
should remain indifferent when r = K. Hence, {S>ñQ´>rã`yQ> H$a XoZm Mm{hE Ed§ `{X r = K hmo Vmo Cgo VQ>ñW
dividend policy is a financing decision. When ahZm Mm{hEŸ& AV:, {S>{dS>oÝS> nm°{cgr EH$ \$m`ZopÝg¨J
dividend policy is treated as a financing {S>grOZ h¡Ÿ& O~ {S>{dS>oÝS> nm°{cgr H$mo EH$ \$m`ZopÝg¨J
decision, the payment of cash dividends is a {S>grOZ Ho$ ê$n _| g_Pm OmE Vmo H¡$e {S>{dS>oÝS²>g H$m
passive residual. ^wJVmZ BgH$m EH$ AàË`j à^md hmoVm h¡Ÿ&