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
James E. Walter
The formula values a share as the present value of the dividend per share plus the present value of the return earned on retained earnings: \( P = \dfrac{D + \frac{R_a}{R_c}(E - D)}{R_c} \).
This is the dividend relevance model of Prof. James E. Walter (1963). It assumes all financing is internal, a constant return on investment \( R_a \) and cost of capital \( R_c \), and an infinite life. Its policy rule: if \( R_a \gt R_c \) retain all earnings, if \( R_a \lt R_c \) pay out all, and if \( R_a = R_c \) the payout does not matter.
Myron Gordon's model is a growth model, \( P = \dfrac{E(1-b)}{k - br} \), based on retention ratio and growth. Modigliani and Miller argued that dividend policy is irrelevant to value in perfect markets. Clarkson and Elliot are not the authors of a standard dividend valuation model.
Hence, James E. Walter.
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 ?
Which one of the following assumptions is not covered in the Walter’s Model of the dividend policy ?
Dividend capitalisation model was developed by
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?
