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The firm should not retain funds if the rate of return earned by it would be than one which could have been cameo by the investors themselves from external investors funds. Such a policy would obviously be detrimental to the interests of shareholders, It is to ascertain the alternative investment opportunities of each of its shareholders and, therefore alternative investment opportunity rate, However, the firm should evaluate the rate obtainable from external investment in firms belonging to the some risk class. If evaluation that the owners have better opportunities outside, the firm should a higher D/P ratio, the other hand, if the firm’s investment opportunities yield a higher rate than that obtained similar external investment, a low D/P is suggested. Therefore, in formulating dividend poh evaluation of the external investment opportunities of owners is very significant.

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