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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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