    # Walter's Dividend Model Walter's model supports the principle that dividends are relevant. The investment policy of a firm cannot be separated from its dividend policy and both are inter-related. The choice of an appropriate dividend policy affects the value of an enterprise.

Assumptions of this model:
• Retained earnings are the only source of finance. This means that the company does not rely upon external funds like debt or new equity capital.
• The firm's business risk does not change with additional investments undertaken. It implies that r(internal rate of return) and k(cost of capital) are constant.
• There is no change in the key variables, namely, beginning earnings per share(E), and dividends per share(D). The values of D and E may be changed in the model to determine results, but any given value of E and D are assumed to remain constant in determining a given value.
• The firm has an indefinite life.

Formula: Walter's model

 P = D    Ke � g

 Where: P = Price of equity shares D = Initial dividend Ke = Cost of equity capital g = Growth rate expected

After accounting for retained earnings, the model would be:

 P = D    Ke � rb

 Where: r = Expected rate of return on firm�s investments b = Retention rate (E - D)/E

Equation showing the value of a share (as present value of all dividends plus the present value of all capital gains) � Walter's model:

 P = D + r/ke (E - D) ke

 Where: D = Dividend per share and E = Earnings per share

Example:

A company has the following facts:
Cost of capital (ke) = 0.10
Earnings per share (E) = \$10
Rate of return on investments ( r) = 8%
Dividend payout ratio: Case A: 50% Case B: 25%
Show the effect of the dividend policy on the market price of the shares.

Solution:

Case A:
D/P ratio = 50%
When EPS = \$10 and D/P ratio is 50%, D = 10 x 50% = \$5

 P = 5 + [0.08 / 0.10] [10 - 5] 0.10 => \$90

Case B:
D/P ratio = 25%
When EPS = \$10 and D/P ratio is 25%, D = 10 x 25% = \$2.5

 P = 2.5 + [0.08 / 0.10] [10 - 2.5] 0.10 => \$85

Conclusions of Walter's model:
• When r > ke, the value of shares is inversely related to the D/P ratio. As the D/P ratio increases, the market value of shares decline. It�s value is the highest when D/P ratio is 0. So, if the firm retains its earnings entirely, it will maximize the market value of the shares. The optimum payout ratio is zero.
• When r < ke, the D/P ratio and the value of shares are positively correlated. As the D/P ratio increases, the market price of the shares also increases. The optimum payout ratio is 100%.
• When r = ke, the market value of shares is constant irrespective of the D/P ratio. In this case, there is no optimum D/P ratio.

Limitations of this model:
• Walter's model assumes that the firm's investments are purely financed by retained earnings. So this model would be applicable only to all-equity firms.
• The assumption of r as constant is not realistic.
• The assumption of a constant ke ignores the effect of risk on the value of the firm.

Online Live Tutor Walter's Dividend Model:

We have the best tutors in accounts in the industry. Our tutors can break down a complex Walter�s Dividend Model problem into its sub parts and explain to you in detail how each step is performed. This approach of breaking down a problem has been appreciated by majority of our students for learning Walter�s Dividend Model concepts. You will get one-to-one personalized attention through our online tutoring which will make learning fun and easy. Our tutors are highly qualified and hold advanced degrees. Please do send us a request for Walter�s Dividend Model tutoring and experience the quality yourself.

Online Walter's Dividend Model Help:

If you are stuck with a Walter's Dividend Model Homework problem and need help, we have excellent tutors who can provide you with Homework Help. Our tutors who provide Walter's Dividend Model help are highly qualified. Our tutors have many years of industry experience and have had years of experience providing Walter�s Dividend Model Homework Help. Please do send us the Walter's Dividend Model problems on which you need Help and we will forward then to our tutors for review.

Topics under Dividend Decisions:       • 