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Walter’s Model In Dividend Theories

Walter’s Model In Dividend Theories:

Prof. James E. Walter argues that the dividend policy almost always affects the value of the firm.

Walter model is based in the relationship between the following important factors:

• Rate of return I

• Cost of capital (k)

According to the Walter’s model, if r > k, the firm is able to earn more than what the shareholders could by reinvesting, if the earnings are paid to them. The implication of r > k is that the shareholders can earn a higher return by investing elsewhere.

If the firm has r = k, it is a matter of indifferent whether earnings are retained or distributed.

Assumptions of Walter's Model:

Walters model is based on the following important assumptions:

1. The firm uses only internal finance.

2. The firm does not use debt or equity finance.

3. The firm has constant return and cost of capital.

4. The firm has 100 recent payout.

5. The firm has constant EPS and dividend.

6. The firm has a very long life.

Walter has evolved a mathematical formula for determining the value of market share.

P = [D + r/Ke (E-D)] / Ke

finance
[Post Image Courtesy of SiriChai at FreeDigitalPhotos.net]

Where,

P = Market price of an equity share

D = Dividend per share

r = Internal rate of return

E = Earning per share

Ke = Cost of equity capital

About Author Mohamed Abu 'l-Gharaniq

when an unknown printer took a galley of type and scrambled it to make a type specimen book. It has survived not only five centuries.

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