Walter’s Model Formula

According to Walter’s Model Formula, the market va

P = D + (E-D) ( r/k ) / k
Here,
P = The value of the share price on every equity (pr
D = The dividend value on every share (dividend pe
E = The value of earning on every share (earnings p
(E-D) = The value that comes after subtracting the d
r = The value of return on every investment (rate of
K = It is the cost of equity.
Book Value Per share

Expected EPS
Rate of Return on equity share holders = ROE

Relation of the Rate of Return with the Cost of Retur

As per Walter’s Model, the rate of return (r), and cost of r
If payout of dividend
Relation increases
r>k Firm’s value decreases
r=k No effect
r<k Firm’s value increases

r required rate of return on investments

Ke rate of return expected by share holders
Limitations of Walter’s Model
It is assumed that no external earning or investment is u
In this case, the value of investment policy and dividend

The scope of Walter’s Model is limited to equity-based o

it is assumed that the rate of return never changes, but

In Walter’s Model, the value of the cost of capital never c

This assumption ignores the risk on the organisation and the i
ula
mula, the market value of a share can be given as:

on every equity (price per equity share)

share (dividend per share)
y share (earnings per share)
er subtracting the dividend of share from earning (retained earni
nvestment (rate of return on investments)
60 Net Worth / No of Shares

15 BV *ROE
= ROE

h the Cost of Return

turn (r), and cost of return have the following impact on the firm’s valu
If payout of dividend
decreases
Firm’s value increases
No effect
Firm’s value decreases
ng or investment is used in this model.
t policy and dividend policy comes below standard.

ed to equity-based organisations. In this model,

never changes, but its value decreases as investment increases.

ost of capital never changes, which is an unrealistic approach.

organisation and the impacts of risk on the organisation’s value.
etained earnings per share).
f Shares
he firm’s values:
creases.
 Proablem No 1

Following are the details regarding three c

A Ltd B Ltd C Ltd
r 15% 5% 10%
Ke 10% 10% 10%
Earings 8 8 8

Calculate the value of an equity share of e

applying Walter's Model
When dividend payment ratio
(a) 25%
(b) 50%
('c) 75%

A Ltd B Ltd C Ltd

r 15% 5% 10%
Ke 10% 10% 10%
Earings 8 8 8
DPR 25%Dividen 2 2 2
Price 110 50 80
DPR 50%Dividen 4 4 4
Price 100 60 80

DPR 75%Dividen 6 6 6
Price 90 70 80
ls regarding three companies

n equity share of each of the companies

nt ratio

DPR 25.00%
Illustration

Given
Company's Rate of return on Investment
Rate of return expected by Share holders
Expected Earnings per Share
Dividend Payout Ratio

P0 Current Price of the share

Dividend Per share 10=G19*50%
Earnings Per share 20
Ke 25%
r 40%

Po 104=E24/F26+(F27/F26)*(E25-E24

40 64 104

Given
Company's Rate of return on Investment
Rate of return expected by Share holders
Expected Earnings per Share
Dividend Payout Ratio

P0 Current Price of the share

Dividend Per share 0=G36*G37
Earnings Per share 20
Ke 25%
r 40%

Po 128=E41/F43+(F44/F43)*(E42-E41
What if company's rate of return on investment is 25%

Given
Company's Rate of return on Investment
Rate of return expected by Share holders
Expected Earnings per Share
Dividend Payout Ratio

P0 Current Price of the share

Dividend Per share 10=G54*G55
Earnings Per share 20
Ke 25%
r 25%

Po 80=E59/F61+(F62/F61)*(E60-E59

r=Ke, the value of the share will not Change

r<Ke
Given
Company's Rate of return on Investment
Rate of return expected by Share holders
Expected Earnings per Share
Dividend Payout Ratio

P0 Current Price of the share

Dividend Per share 10=G74*G75
Earnings Per share 20
Ke 25%
r 20%

Po 72=E79/F81+(F82/F81)*(E80-E79
 40%r
25%Ke
20E
50%Dividend Pay out %

G19*50%
/F26)*(E25-E24)/F26

Given
40% Company's Rate of return on Inves
25% Rate of return expected by Share h
20 Expected Earnings per Share
0% Dividend Payout Ratio

P0 Current Price of the share

G36*G37 Dividend Per share
Earnings Per share
Ke
r

/F43)*(E42-E41)/F43 Po 80=N41/O43+(O44/O
estment is 25% What if company's rate of r
Dividend Payout Ratio is Z
Given
25%r Company's Rate of return o
25%Ke Rate of return expected by
20E Expected Earnings per Sha
50%Dividend Pay out % Dividend Payout Ratio

P0 Current Price of the sha

G54*G55 Dividend Per share
Earnings Per share
Ke
r

/F61)*(E60-E59)/F61 Po 80

Change

r<Ke and dividend payou

Given
20%r Company's Rate of return o
 25%Ke Rate of return expected by
20E Expected Earnings per Sha
50%Dividend Pay out % Dividend Payout Ratio

r<Ke P0 Current Price of the sha

G74*G75 Dividend Per share
Earnings Per share
Ke
r

/F81)*(E80-E79)/F81 Po 64

r<Ke and dividend payou

r<Ke and dividend payou

Given
Company's Rate of return o
Rate of return expected by
Expected Earnings per Sha
Dividend Payout Ratio
P0 Current Price of the sha
Dividend Per share
Earnings Per share
Ke
r

Po 80
e of return on Investm 40%
xpected by Share hol 25%
ngs per Share 20
t Ratio 100%

e of the share
20=P36*P37
20
25%
40%

N41/O43+(O44/O43)*(N42-N41)/O43
company's rate of return on investment is 25%
d Payout Ratio is Zero

y's Rate of return on Investm 25%r

eturn expected by Share hol 25%Ke
d Earnings per Share 20E
d Payout Ratio 0%Dividend Pay out %

ent Price of the share

d Per share 0=Q54*Q55
Per share 20
25%
25%

=O59/P61+(P62/P61)*(O60-O59)/P61

nd dividend payout ratio is zero

y's Rate of return on Investm 20%r

 eturn expected by Share hol 25%Ke
d Earnings per Share 20E
d Payout Ratio 0%Dividend Pay out %

ent Price of the share r<Ke

d Per share 0=Q74*Q75
Per share 20
25%
20%

=O79/P81+(P82/P81)*(O80-O79)/P81

nd dividend payout ratio is 100%

nd dividend payout ratio is zero

y's Rate of return on Investm 20%r

eturn expected by Share hol 25%Ke
d Earnings per Share 20E
d Payout Ratio 100%Dividend Pay out %
ent Price of the share r<Ke
d Per share 20=Q93*Q94
Per share 20
25%
20%

=O98/P100+(P101/P100)*(O99-O98)/P100
Numerical Examples of Walter Model
Earning per share 4
Dividend payment 4
Rate of return required
by investors (k) 15%
Rate of return on Price per share as per
investments ('r) Walter model
20% 26.67
15% 26.67
10% 26.67

Numerical Examples of Gorden Model

Fraction of earnings the
firm ploughs back
(retention) 0.25
Rate of return on Price per share as per
investments ('r) Gorden model
20% 30.00
15% 26.67
10% 24.00
 2

31.11
26.67
22.22

orden Model

0.5

40.00
26.67
20.00
Gordon Growt Model Assumption
 Illustration

Growth Firm r>K

Return 20%
Ke 15%
Earnings 4
b Retained Earn 25%

Price P0 30

b Retained Earn 50%

Price 40
wt Model Assumptions
Normal r=k Declining Firm r<k
15% 10%
15% 15%
4 4
25% 25%

26.666666666667 24

50% 50%

26.666666666667 20
Given
No of shares 100,000given

Face value 10given

Reserves 7,000,000given
Equity share capital 1,000,000=10*100000
Net worth 8,000,000=SUM(E21:E22)
Expeced Rate of return on equity ROE 25%
Retention Ratio 40%given
Pay out ratio 60%=1-E25
Equity Capitaliztion rate 25%
Book Value 80=E23/E18
Expected EPS 20=E28*G24
Expected Dividend 12=E29*E26
Expected Growth Rate 10.0%=E25*G24
Current value of share as per Gordon Model

Note the formula for reference:

Net worth = Equity share capital + Reserves
Book Value = Networth / No of shares
EPS = Book value * ROE
Dividend Per share Earnings * Div Pay out ratio
growth g=Retention ratio * ROE br
E21:E22) Net worth = Equity share capital + Reserves
ROE
 Ke given
Book Value = Networth / No of shares
EPS = Book value * ROE
D1 Dividend Per share Earnings * Div Pay out ratio
g=br Retention ratio * ROE
80=E30/(G24-E31)

out ratio
Reserves
Pay out ratio
Given
Book Value Per Share 400
ROE 20%
DPR 40%
Retention Ratio 60%b
Cost of equity or Expected rate of return by shareholder
Expected EPS Book value * ROE
Expected Dividend
Growth Rate br
Present value of share as per Gordon Model
rn by shareholder 25%
 80
32
12.00%
D1/(Ke-g) 246.154
Book Value per share 1000
ROE 25%
Ke 25%
DPR 60%
Retention Ratio 40%
1/ Expected EPS by end of year 1 Book Value * ROE

2/ Expected dividend for year 1 150

3/ Expected value of share by end of year 1

4/ Expected DPS for Year 2 165

Expected EPS by end of year 2 275

Expected Dividend for year 2 165
5/ Expected Share value by end of year 2

Growth rate for Year 2 10.000%

or Dividend Growth rate 10.000%

Also as per Gordon Growth Model , growth rate = b * R

b
ok Value * ROE 250

1100Book value initial + Earnings - dividends

1210

wth rate = b * R

10.0%
dividends
Expected EPS by year end 250
ROE 25%
Ke 25%

Case 1
DPR 40% DPS 100
Retention Rato 60%b
growth 15.00%

Price of the share 1000

Case 2
DPR 80% Dividend 200
Retention Rato 20%b
growth 5.00%

Price of the share 1000.0000

Earnings
r
Ke

Case 2
DPR 60% Dividend
Retention Rato 40%b
growth 10.00%

Price of the share 1000

150
m is the no of new shares to be issued
I Investment required
E Earnings in Year 1
n no of shares existing
D1 Expected Dividend in Year 1
Given
Price to 200
No of shares 20,000
Investment Plan 2,000,000
Case 1 No dividend
Case 2 50 Per share
Case 1 when No dividend
P1= P0*(1+Ke)-D1
P1 250
Earnings 50

Case 2
P1= P0*(1+Ke)-D1
P1 200
Earnings 50

Particulars Case 1

Total Earnings 1000000

Less Dividends 0
Retained Earnings 1000000
Investment Obligation 2000000
New Additional Investment
requried for fresh issue of
equity shares 1000000
Share Price 250
No of shares 4,000
 Ke 25%
Existing

0
50Dividend Payout 100%
EPS

EPS Note : Dividend is only the earnings as there is d

Case 2

1000000
1000000
0
2000000

2000000
200
10,000 Using the formula

m is the no of new shares

I investment
Earnings
n no of shares
D1 Dividend

Investment
Earnings
N of shares exi
dividend d1
Share price
m

Investment
Earnings
N of shares exi
dividend d1
Share price
m
nings as there is diff in price
e formula

no of new shares to be issued

shares

Case 1
2,000,000
1,000,000
20,000
0
250
4,000.00

Case 2
2,000,000
1,000,000
20,000
50
200
10,000.00