Dividend Capitalization Model

Dividend Capitalization Model According to Gordon, the market value of a share is equal to the present value of future streams of dividends. A simplified version of Gordon’s model can be symbolically, expressed as TABLE Dividend Policy and Value of Shares of Hypothetical Ltd (Gordon’s Model) Gordon’s Model Finance-Assignments.comInstructions Feel free to send us an inquiry, we reply back r


Arguments It can be seed from the assumptions of Gordon’s model that they are similar to those of Walters model. As a result, Gordon’s model, like Walter’s, contends that dividend policy of the firm is relevant and that investors put a positive premium on current incomes dividends. The crux of Gordon’s arguments is a two fold assumption: (i) investors are risk averse, and (ii) they put a 

Gordon(s) Model

Gordon(s) Model Another theory which contends that dividends are relevant is Gordon’s model. This model, which opines that dividend policy of a firm affects its value, is based on the following assumptions: 1. The firm is an all equity firm. No external financing is used and investment programmers are financed exclusively by retained earnings. 2. r and k are constant. 3. The firm has perpetual life. 4. T


Limitations The Walter’s model, one of the earliest theoretical models, explains the relationship between dividend policy and value of the firm under certain simplified assumptions. Some of the assumptions do not stand critical evaluation. In the first place, the Walter’s model assumes that the firm’s investments are financed exclusively by retained earnings; no external financing is used. The

Walter(s) Model (Table)

TABLE Dividend Policy and Value of Shares (Walters Model) Walter’s Model   Finance-Assignments.comInstructions Feel free to send us an inquiry, we reply back real quick. Or directly email us at order@finance-assignments.comName *Email *Phone *Requirements/ Instructions File Upload File Upload File Upload  VerificationPlease enter any two digits *Example: 12This box is for spam protection - p


RELEVANCE OF DIVIDENDS In sharp contrast to the MM position, there are some theories that consider dividend decisions be an active variable in determining the value of a firm. The dividend decision is, therefore, relevant. We critically examine below two theories representing this notion: (i) Walter’s Model and (ii) Gordon’s Model. Walter(s) Model Proposition Walter’s model’? supports the


Underpricing Finally, the MM hypothesis would also not be valid when conditions are a to be uncertain because of the prices at which the firms can sell shares to raise funds to investment programmed consequent upon the distribution of earnings to the shareholders irrelevance argument would valid provided the firm is able to sell shares to replace dividend the current price. Since the shares would have to be offer

Preference for Current Income

Preference for Current Income The third aspect of the uncertainty question relating to dividends is based on the desire of investors for current income to meet consumption requirements, The MM hypothesis of irrelevance oi dividends implies that in case dividends are not paid, investors who prefer current income can sell a part of their holdings in the firm for the purpose. But, under uncertainty conditions, th

Near Vs Distant Dividend

Near Vs Distant Dividend One aspect of the uncertainty situation is the payment of dividend now or at a later the used to near dividend. If, however, the net earnings are retained. This shareholders, would be entitled to receive a return after some time in the form of price of shares (capital gains) or bonus shares and so on. The dividends may, then be referred to as capital or future dividend. The crux of the

Institutional Restrictions

Institutional Restrictions The dividend alternative is also supported by legal restrictions as to the type of ordinary shares in which certain investors can invest. For instance, the life insurance companies are permitted in terms of section 27-A (1) of the Insurance Act, 1938, to invest in only such equity shares on which a dividend of not less than 4 per cent including bonus has, been for 7 years or for at lea