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

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