Professional Documents
Culture Documents
Dividend Theories
Relevance Theories
Walters Model
Gordons Model
Irrelevance Theories
Relevance Theory
Walters Model
Gordons Model
Walters Model
r>K o
Normal firms:
r=K o
Declining firms:
r<K o
Assumptions
Only internal source of funds used
r and K o constant
All earnings are paid as dividends or completely
reinvested
EPS; and DPS never change
Perpetual life
Formula
Where: P
D
E
(ED)
r
Ke
Interpretation
r>K o=
r=K o=
No optimum DP Ratio
r<K o=
Criticisms
No external financing
Constant rate of return as investment
Constant cost of capital
Gordons Model
Assumptions
All equity firm;
Properties financed by retained earnings;
r is constant;
K o remains constant;
K o>b. r;
Perpetual stream of earnings;
Perpetual life;
Retention ratio constant;
No corporate taxes
Formula
Where: P=
E=
b=
(1- b)=
K=
r=
b. r =
E (1 b)
P
K b r
Interpretation
MM Hypothesis
Assumptions
Existence of perfect capital markets
No taxes
Firm has fixed investment policy
There is no risk
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