Which of the following statements is/are false? (i) Capital profits can never be distributed as dividends to the shareholders. (ii) Dividends are paid out of profits and, therefore, do not affect the liquidity position of the firm. (iii) Every company should follow the policy of low dividend payment. (iv) Walter’s model suggests that dividend payment does not affect the market price of the share. Choose the correct answer from the code given below: Correct Answer (i), (ii), (iii) and (iv) 1) Capital profits can never be distributed as dividends to the shareholders- False Explanation: The distribution of dividends is nothing but the distribution of profits to the shareholders. The amount of profit earned by the business from the sale of its assets, shares, and debentures is capital profit. If assets are sold at a price more than their book values then the excess of book value is capital profit. Such profits are transferred to the capital reserve. There are certain limitations as to utilizing Capital profits for dividend distribution; which can be used only if all the given conditions are satisfied. 2) Dividends are paid out of profits and, therefore, do not affect the liquidity position of the firm- False. Explanation: Companies issue dividends to reward shareholders for their investment. Dividends paid can be in the form of cash or additional shares called stock dividends. Cash dividends affect the cash and shareholder equity on the balance sheet; retained earnings and cash are reduced by the total value of the dividend. Stock dividends have no impact on the cash position of a company and only impact the shareholder's equity section of the balance sheet. Thus, cash dividends affect the liquidity of the firm. 3) Every company should follow the policy of low dividend payment- False Explanation: According to Walter's model, growing firms should not pay any dividends and retain all the profits while a declining firm should not retain any profits and distribute all of them as dividends. Thus, dividend payment decision is affected by various factors and vary from company to company. 4) Walter’s model suggests that dividend payment does not affect the market price of the share- False Explanation: Walter's model supports the doctrine that dividends are relevant. The investment policy of a firm cannot be separated from its dividend policy and both are interlinked. The key argument in support of the relevance of Walter’s model is the relationship between the return on a firm’s investment (r) and its cost of capital/ required rate of return (k). Thus, option 2 is the correct answer as all the statements are given in the question are incorrect.