Sikkim Manipal Finanacial Management Ramabhadran

Related Essays

  • Cfa Questions Based on AIMR's Standards of Professional Conduct, which of the following statements are a violation of Standard IV(B.6), Prohibition against Misrepresentation? A...
  • Lester Problem Solution Problem Solution: Lester Electronics University of Phoenix Problem Solution: Lester Electronics Lester Electronics, Incorporated (LEI) established a business rela...
  • Msft And Apple Shares Comparison Assessment You are a young financial analyst and you are given the job to make a choice of investment in the computer industry. You are to make in an in-depth ana...
  • Problem Solution: Lester Electronics Problem Solution: Lester Electronics Corporate growth usually occurs internally when a firm expands its existing departments through normal capital budgeting acti...
  • Lester Electronics Problem Solution Running head: PROBLEM SOLUTION: LESTER ELECTRONICS Problem Solution: Lester Electronics Letitia Hoch University of Phoenix Problem Solution: Lester Electronics Co...

Sikkim Manipal Finanacial Management Ramabhadran

1¬) Briefly explain Walter's and Gordon's theory of dividend?

Gordon's theory

The model opines that dividend policy of a firm affects its value based on following assumptions:

1) The firm is an all equity firm.

2) There is no outside financing and all investments are financed exclusively by retained earnings.

3) Internal rate of return(R) of the firm remains constant.

4) Cost of capital (K) of firm also remains constant regardless of the change in the risk complexion of the firm.

5) The firm derives its earnings in perpetuity.

6) The retention ratio(b) once decided is constant. Thus the growth rate (g) is also constant(g=br)

7) K>g

8) A corporate tax does not exist.

Gordon used the following formula to find out price per share





P = E1 (1-b)

K- br

P = price per share.

K = cost of capital.

E1 = earnings per share.

b = retention ratio.

(1-b) = payout ratio.

g = growth rate





According to Gordon, when R>K the price per share increases as the dividend pay out ratio decreases.





Thus Gordon's view can be summarized as below:

1) The optimum payout ratio for a growth firm (R>K) is zero.

2) There is no optimum payout ratio for a normal firm(R=K).

3) Optimum pay out ratio for a declining firm (Rk 0 % i.e. shouldn't pay any dividend

Normal firm r=k DPR doesn't affect the value of firm

Declining rk, should distribute all earning when r

View Full Essay

  • Submitted by: blaine
  • Date Submitted: 05/24/2008 04:29 PM
  • Category: Business
  • Words: 677
  • Pages: 3
  • Views: 292
  • Popularity Rank: 4922

View Full Essay

Want More?

Thousands of students trust PeerPapers.com for help with their writing. Shouldn't you?

Join Now