Walter and Gordon model analyse the impact of distribution of dividends on the valuation of the firm but the formula used in both the cases are different. CompanyABC Ltd wanted to evaluate the price of the share in both cases. The company earns ₹ 50 per share and expects the same for the next year. The cost of capital to the firm is 11%. The company earns return on investment of 15% and the firm is planning dividend payout ratio of 60%. Calculate: a. Price of the share using Walter Model. Comment on the relationship between return on investment and cost of capital in the case above and decision of the firm whether dividend is to be declared or not. b. Price of the share using Gordon model. Comment on the relationship between return on investment and cost of capital in the case above and decision of the firm whether dividend is to be declared or not.
Dividend Policy
A dividend is a part of the profit paid to the shareholder in an organization. The management of the organization has the right to decide the policy for giving a dividend from the earnings to the shareholder. However, an organization is not in the obligation to declare a dividend for the investor. Dividend policy differs from organization to organization. As the management has the only authority to decide dividend rate, dividend amount, and time of dividend payout by considering all other elements that create an impact on the payment of a dividend.
Stocks And Dividends
Stock or equities are generally sold and bought in the Stock Exchange or which is popularly known as the stock market. Stocks are issued in the Stock Exchange for the sole purpose of raising funds for the Corporation or the company itself. Now since an individual has purchased a portion of the Corporation or company, he or she may claim to be a part of the earnings or profit of the company.
3. Walter and Gordon model analyse the impact of distribution of dividends on the
valuation of the firm but the formula used in both the cases are different. CompanyABC Ltd wanted to evaluate the price of the share in both cases. The company earns ₹
50 per share and expects the same for the next year. The cost of capital to the firm is
11%. The company earns return on investment of 15% and the firm is planning
dividend payout ratio of 60%. Calculate:
a. Price of the share using Walter Model. Comment on the relationship between return on
investment and cost of capital in the case above and decision of the firm whether
dividend is to be declared or not.
b. Price of the share using Gordon model. Comment on the relationship between return on
investment and cost of capital in the case above and decision of the firm whether
dividend is to be declared or not.
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