“WALTER & GORDON MODELS ON DIVIDEND POLICY”

Presented by :AYUSH KAPIL MBA(Finance)

Submitted to :Dr. SUDHANSU VERMA FMS G.K.V. Haridwar

CONTENTS :üIntroduction üDividend policy’s Theories – üWalter Model üGordon Model üModigliani miller Model .

– This decision is considered a financing decision because the profits of the corporation are an important source of financing .Introduction : ‘Dividend Policy’ • Dividend Policy refers to the explicit or implicit decision of the Board of Directors regarding the amount of residual earnings (past or present) that should be distributed to the shareholders of the corporation.

Walter Model 2.Dividends’ three theories :1.Gordon Model 3.Modigliani miller (MM)  Model WALTER MODEL Divid end polic y MODIGL IANI MILLER ( MM ) MODEL GORDON MODEL .

Walter’s model :• Walter’s model supports the doctrine that dividends are relevant. according to Walter.  . The choice of an appropriate dividend policy affects the value of an enterprise. The investment policy of a firm cannot be separated from its dividends policy and both are. interlinked.

All financing is done through retained earnings: external sources of funds like debt or new equity capital are not used.With additional investments undertaken. 3. 4. E.1. D. 2.There is no change in the key variables. It implies that r and k are constant. the firm’s business risk does not change.   . any given value of E and D are assumed to remain constant in determining a given value.The firm has perpetual (or very long) life. namely. beginning earnings per share. but. and dividends per share. The values of D and E may be changed in the model to determine results.

MP = Market price per share D = Dividend per share E = Earnings per share r = Firm’s rate of return k = Cost of capital  Criticisms ~ assumptions of the theory. . mathematical formula fo calculation of expected market price per share – MP = D + (r / k) * (E – D) k          Where. According to Walter model.

Gordon’s Model :- • Another theory which contends that dividends are relevant is Gordon’s model. is based on the following assumptions: . This model. which opines that dividend policy of a firm affects its value.

The retention ratio.1. The firm is an all-equity firm. ke > br. (g = br) is also constant. 5. . No external financing is used and investment programmes are financed exclusively by retained earnings. r and ke are constant. once decided upon. 4. 3. Thus. The firm has perpetual life. is constant. 2. the growth rate.

 According to Gordon model. mathematical formula for calculation of expected market price per share – MP = E (1 – b) ke – br          MP = Market price per share b = retention ratio E = Earnings per share k = cost of capital r = rate of return .

 THANK  YOU .

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