Dividend capitalisation model was developed by
Myron J. Gordon
The dividend capitalisation model was developed by Myron J. Gordon (1959, 1962). It values a share as the present value of an infinite stream of dividends growing at a constant rate, giving the price as the next dividend divided by the difference between the required rate of return and the growth rate.
Gordon's model is a dividend relevance theory: because investors are risk averse and prefer a certain dividend today to uncertain future capital gains (the bird-in-hand argument), dividend policy affects the value of the firm.
James E. Walter also developed a dividend relevance model, but it relates the optimum payout to the relationship between the firm's rate of return and its cost of capital; it is not called the dividend capitalisation model. Merton H. Miller and Franco Modigliani put forward the dividend irrelevance hypothesis (1961). Ezra Solomon is known for his work on the scope of financial management and on cost of capital, not for this model.
Hence, Myron J. Gordon.
Similar Questions
Which one of the following assumptions is not included in the James E. Walter Valuation model ?
“Dividend is not relevant in determining the value of the company”. Who among the following held this opinion ?
Who formulated the following model for estimating the market price of equity share ?
\(P = \frac{D + \frac{R_a}{R_c}(E - D)}{R_c}\)
Where, P = Market price of equity share
D = DPS
E = EPS
E – D = Retained earning per share
Ra = Internal rate of return on investment
Rc = Cost of capital
Which one of the following assumptions is not covered in the Walter’s Model of the dividend policy ?
In case, cost of capital is 10%, EPS ₹ 10, IRR 8% and Retention Ratio is 60%, then the value of equity share as per Gordon’s Model will be :
Important Questions from Dividend decision
Declared and paid dividend Rs. 7,00,000 is
Which of the following assumptions form the basis of the MM Hypothesis in stating irrelevance of capital structure regarding the weighted average cost of capital remaining constant?
(A) Perfect capital markets
(B) Heterogenous risk class
(C) Absence of taxes
(D) Full dividend payout
(E) Same expectation of firm's EBIT with which to evaluate the value of a firm
Choose the correct answer from the options given below
The formula \(P_0=\frac{D}{K}+\frac{\frac{R}{K}(E-D)}{K}\) (Where P0 is market price of shares, E is earning per share, D is dividend per share, R is rate of Return and K is cost of equity) for determining the dividend of the firm has been given by: :
Given below are two statements, one labelled as Assertion (A) and the other labelled as Reason (R). Read the statements and choose the correct answer using the code given below.
Assertion (A): As per M-M hypothesis the value of the levered firm is equal to the value of the unlevered firm.
Reason (R): The process of arbitrage becomes applicable in such situations.
- The earning per share for Avanti corporation is Rs. 4.0. The rate of return on investments is 16 per cent and the return required by its shareholders is 12 percent. What will be the price per share as per the Walter model, if the payout ratio is 40 per cent?
