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      Question

      Under Walter’s model, if a firm’s return on

      investment (r) > cost of equity (ke), what should the firm do?
      A Pay out all profits as dividend Correct Answer Incorrect Answer
      B Declare bonus shares Correct Answer Incorrect Answer
      C Retain all earnings Correct Answer Incorrect Answer
      D Buy back shares Correct Answer Incorrect Answer

      Solution

      Walter’s model suggests when r > ke, firm should retain earnings to maximize shareholder wealth.

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