Determines what proportion of earnings is to be shared to shareholders

Amount of ploughing back in firm

The firm is equity financed Firms life is infinite R O I is constant No taxes

Growth Firm - When (r>k), the price per share increases as dividend payout ratio decreases Normal Firm - When (r=k), the price per share does not vary with changes in dividend payout ratio Declining Firm - When (r<k), the price per share increases as dividend payout ratio increases. P= D +(E D)r/k k

Growth Firm - When (r>k), the price per share increases as dividend payout ratio decreases Normal Firm - When (r=k), the price per share does not vary with changes in dividend payout ratio

Declining Firm - When (r<k), the price per share increases as dividend payout ratio increases.
P0= E1(1 - b) k - br

By Graham and Dodd More weighted given to dividend than on retained earnings P= m D + D + R
3

Value of Firm depends solely on earnings power Assumptions:

Capital markets are perfect Investors are rational Floatation costs are nil No taxes

P0 = 1 (D1+P1) (1+p)