Here are the steps to solve this problem using the Walter model:
(i) Payout ratio = 40%
EPS = $4
DPS = 40% of $4 = $1.60
Retained earnings per share = EPS - DPS = $4 - $1.60 = $2.40
Using the Walter model formula:
P = D + r(E-D)/k
Plugging in the values:
P = $1.60 + 0.18(2.40)/0.15
P = $1.60 + $1.44
P = $3.04
(ii) Payout ratio = 50%
DPS
Dividend Policy resolves two questions:
Question 1: Does dividend policy affect firm value?
Question 2: If so, What is the optimal level of distribution ratio i.e., % Net Income to be distributed as dividend (Payout ratio). These issues are discussed under Irrelevance Theories (Modigliani and Miller’s Model) and
Relevance Theories (Walter’s Model , Gordon’s Model)
Dividend Policy resolves two questions:
Question 1: Does dividend policy affect firm value?
Question 2: If so, What is the optimal level of distribution ratio i.e., % Net Income to be distributed as dividend (Payout ratio). These issues are discussed under Irrelevance Theories (Modigliani and Miller’s Model) and
Relevance Theories (Walter’s Model , Gordon’s Model)
Fixed Income securities- Analysis and Valuation. Very useful for CFA and FRM level 1 preparation candidates. For a more detailed understanding, you can watch the webinar video on this topic. The link for the webinar video on this topic is https://www.youtube.com/watch?v=r9j6Bu3aUNI
what is dividend policy
theory of dividend policy
dividend irrelevance theory
Modigliani and miller approach
MM formula
assumption
dividend relevant theory
Walters model
formula
assumption
Fixed Income securities- Analysis and Valuation. Very useful for CFA and FRM level 1 preparation candidates. For a more detailed understanding, you can watch the webinar video on this topic. The link for the webinar video on this topic is https://www.youtube.com/watch?v=r9j6Bu3aUNI
what is dividend policy
theory of dividend policy
dividend irrelevance theory
Modigliani and miller approach
MM formula
assumption
dividend relevant theory
Walters model
formula
assumption
Dividend is that portion of net profits which is distributed among the shareholders. The dividend decision of the firm is of crucial importance for the finance manager since it determines the amount to be distributed among shareholders and the amount of profit to be retained in the business.
Dividend policy
What is Dividend?
What is dividend policy?
Theories of Dividend Policy
Relevant Theory
Walter’s Model
Gordon’s Model
Irrelevant Theory
M-M’s Approach
Traditional Approach
Referred to:
Prasanna Chandra
Even tho Pi network is not listed on any exchange yet.
Buying/Selling or investing in pi network coins is highly possible through the help of vendors. You can buy from vendors[ buy directly from the pi network miners and resell it]. I will leave the telegram contact of my personal vendor.
@Pi_vendor_247
What price will pi network be listed on exchangesDOT TECH
The rate at which pi will be listed is practically unknown. But due to speculations surrounding it the predicted rate is tends to be from 30$ — 50$.
So if you are interested in selling your pi network coins at a high rate tho. Or you can't wait till the mainnet launch in 2026. You can easily trade your pi coins with a merchant.
A merchant is someone who buys pi coins from miners and resell them to Investors looking forward to hold massive quantities till mainnet launch.
I will leave the telegram contact of my personal pi vendor to trade with.
@Pi_vendor_247
how to swap pi coins to foreign currency withdrawable.DOT TECH
As of my last update, Pi is still in the testing phase and is not tradable on any exchanges.
However, Pi Network has announced plans to launch its Testnet and Mainnet in the future, which may include listing Pi on exchanges.
The current method for selling pi coins involves exchanging them with a pi vendor who purchases pi coins for investment reasons.
If you want to sell your pi coins, reach out to a pi vendor and sell them to anyone looking to sell pi coins from any country around the globe.
Below is the contact information for my personal pi vendor.
Telegram: @Pi_vendor_247
how to sell pi coins on Bitmart crypto exchangeDOT TECH
Yes. Pi network coins can be exchanged but not on bitmart exchange. Because pi network is still in the enclosed mainnet. The only way pioneers are able to trade pi coins is by reselling the pi coins to pi verified merchants.
A verified merchant is someone who buys pi network coins and resell it to exchanges looking forward to hold till mainnet launch.
I will leave the telegram contact of my personal pi merchant to trade with.
@Pi_vendor_247
Seminar: Gender Board Diversity through Ownership NetworksGRAPE
Seminar on gender diversity spillovers through ownership networks at FAME|GRAPE. Presenting novel research. Studies in economics and management using econometrics methods.
USDA Loans in California: A Comprehensive Overview.pptxmarketing367770
USDA Loans in California: A Comprehensive Overview
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The secret way to sell pi coins effortlessly.DOT TECH
Well as we all know pi isn't launched yet. But you can still sell your pi coins effortlessly because some whales in China are interested in holding massive pi coins. And they are willing to pay good money for it. If you are interested in selling I will leave a contact for you. Just telegram this number below. I sold about 3000 pi coins to him and he paid me immediately.
Telegram: @Pi_vendor_247
where can I find a legit pi merchant onlineDOT TECH
Yes. This is very easy what you need is a recommendation from someone who has successfully traded pi coins before with a merchant.
Who is a pi merchant?
A pi merchant is someone who buys pi network coins and resell them to Investors looking forward to hold thousands of pi coins before the open mainnet.
I will leave the telegram contact of my personal pi merchant to trade with
@Pi_vendor_247
how can i use my minded pi coins I need some funds.DOT TECH
If you are interested in selling your pi coins, i have a verified pi merchant, who buys pi coins and resell them to exchanges looking forward to hold till mainnet launch.
Because the core team has announced that pi network will not be doing any pre-sale. The only way exchanges like huobi, bitmart and hotbit can get pi is by buying from miners.
Now a merchant stands in between these exchanges and the miners. As a link to make transactions smooth. Because right now in the enclosed mainnet you can't sell pi coins your self. You need the help of a merchant,
i will leave the telegram contact of my personal pi merchant below. 👇 I and my friends has traded more than 3000pi coins with him successfully.
@Pi_vendor_247
how can I sell pi coins after successfully completing KYCDOT TECH
Pi coins is not launched yet in any exchange 💱 this means it's not swappable, the current pi displaying on coin market cap is the iou version of pi. And you can learn all about that on my previous post.
RIGHT NOW THE ONLY WAY you can sell pi coins is through verified pi merchants. A pi merchant is someone who buys pi coins and resell them to exchanges and crypto whales. Looking forward to hold massive quantities of pi coins before the mainnet launch.
This is because pi network is not doing any pre-sale or ico offerings, the only way to get my coins is from buying from miners. So a merchant facilitates the transactions between the miners and these exchanges holding pi.
I and my friends has sold more than 6000 pi coins successfully with this method. I will be happy to share the contact of my personal pi merchant. The one i trade with, if you have your own merchant you can trade with them. For those who are new.
Message: @Pi_vendor_247 on telegram.
I wouldn't advise you selling all percentage of the pi coins. Leave at least a before so its a win win during open mainnet. Have a nice day pioneers ♥️
#kyc #mainnet #picoins #pi #sellpi #piwallet
#pinetwork
Abhay Bhutada Leads Poonawalla Fincorp To Record Low NPA And Unprecedented Gr...Vighnesh Shashtri
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The Evolution of Non-Banking Financial Companies (NBFCs) in India: Challenges...beulahfernandes8
Role in Financial System
NBFCs are critical in bridging the financial inclusion gap.
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NBFCs contribute significantly to India's GDP.
They support sectors like micro, small, and medium enterprises (MSMEs), housing finance, and personal loans.
Turin Startup Ecosystem 2024 - Ricerca sulle Startup e il Sistema dell'Innov...Quotidiano Piemontese
Turin Startup Ecosystem 2024
Una ricerca de il Club degli Investitori, in collaborazione con ToTeM Torino Tech Map e con il supporto della ESCP Business School e di Growth Capital
2. Overview:
What is Dividend?
What is dividend policy?
Theories of Dividend Policy
Relevant Theory
Walter’s Model
Gordon’s Model
Irrelevant Theory
M-M’s Approach
Prepared by Tishta Bachoo
2
3. Once a company makes a profit, management must decide
on what to do with those profits. They could continue to
retain the profits within the company, or they could pay out
the profits to the owners of the firm in the form of
dividends.
Once the company decides on whether to pay dividends they
may establish a somewhat permanent dividend policy, which
may in turn impact on investors and perceptions of the
company in the financial markets. What they decide depends
on the situation of the company now and in the future. It also
depends on the preferences of investors and potential
investors. Prepared by Tishta Bachoo
3
4. Dividend
Dividends are payments made to stockholders from a
firm's earnings, whether those earnings were generated
in the current period or in previous periods. Dividends
are paid from the company’s earnings taking into
account the Payout Ratio.
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4
Payout ratio is the proportion of earnings paid out
as dividends to shareholders, typically expressed as
a percentage.
5. Dividend Policy
Dividend policy is the set of guidelines a company
uses to decide how much of its earnings it will pay
out to shareholders.
Some evidence suggests that investors are not
concerned with a company's dividend
policy since they can sell a portion of their portfolio
of equities if they want cash.
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5
6. Dividend Policies involve the decisions, whether:
To retain earnings for capital investment and other
purposes; or
To distribute earnings in the form of dividend
among shareholders; or
To retain some earning and to distribute remaining
earnings to shareholders.
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7. There is no obligation for firms to pay dividends to common
shareholders.
Shareholders cannot force a Board of Directors to declare a
dividend, and courts will not interfere with the BOD’s right to
make the dividend decision because:
Board members are jointly and severally liable for any damages
they may cause
Board members are constrained by legal rules affecting
dividends including:
Not paying dividends out of capital
Not paying dividends when that decision could cause the
firm to become insolvent
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7
8. Forms of Dividend
Dividend basically is a distribution of profits earned
by a joint stock company among its shareholders.
Mostly dividends are paid in cash, but there are also
other forms such as script dividends, stock dividends,
and in an unusual circumstances, property dividends.
These are briefly described below:
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8
9. Scrip Dividend: means of payment when the company
cannot pay in cash. This system simply means
shareholders are paid with commodities, vouchers, tokens
or some other indication of credit instead of cash.
Bond Dividend: Referred to as fixed-income investment
instruments because they promise the holder a fixed
payment as returns on investment.
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9
10. Prepared by Tishta Bachoo
10
Property Dividend: refers to the formal distribution of
an asset other than cash to holders of preferred or
common shares of stock.
Cash Dividend: money paid to stockholders, normally
out of the corporation's current earnings or accumulated
profits.
Bonus share or Stock dividends: do not come with an
explicit payment promise. The amount of dividends paid
to stockholders varies depending on the profits of the
issuing company
11. Factors Affecting Dividend Policy
Legal Restrictions: Company laws
Trend of earnings: High profit or low
Desire and type of Shareholders
Nature of Industry: capital intensive, asset intensive, share
intensive
Age of the company: old or new in market
Taxes on Retained Earnings
Future Financial Requirements: will a loan be needed, will
there be expansion, will the firm go international
Stage of Business cycle: Recession, boom, depression, recovery
Prepared by Tishta Bachoo
11
13. Dividend Models
Dividend Relevance Model
Walter Model
Gordon Model
Dividend Irrelevance Model
Miller & Modigliani Model
Prepared by Tishta Bachoo
13
15. Relevant Theory
If the choice of the dividend policy affects the
value of a firm, it is considered as relevant. In
that case a change in the dividend payout ratio
will be followed by a change in the market value
of the firm.
If the dividend is relevant, there must be an
optimum payout ratio. Optimum payout ratio is
that ratio which gives highest market value per
share.
Prepared by Tishta Bachoo
15
16. The dividend policy given by James Walter
considers that dividends are relevant and they do
affect the share price.
The model is simple and easy to compute.
Two factors which influence the market price of the
share are the EPS and DPS.
Walter’s Model
Prepared by Tishta Bachoo
16
17. Walter’s Model
In this model , he studied the relationship
between the internal rate of return (r) and the
cost of capital of the firm(K), to give a dividend
policy that maximizes the shareholders’ wealth.
When r > Ke the firm has to adopt Zero% payout policy.
r < ke the firm has to adopt 100% payout policy.
r = ke any policy between 0 to 100% payout.
Walter model also look at profitable opportunities
whether to retain their earning instead of getting
dividends. The cost of retention is important here.
Prepared by Tishta Bachoo
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18. Formula of Walter’s Model
Where,
P = Current Market Price of equity share
E= Earnings per share
D = Dividend per share (use payout ratio to calculate)
(E-D)= Retained earnings per share (EPS- DPS)
r = Rate of Return on firm’s investment or % of retained earnings
k = Cost of Equity Capital or Cost of capitalization
P
D + r (E-D)
k
k
=
Prepared by Tishta Bachoo
18
19. Assumptions of Walter’s Model:
The firm finances all investment through retained earnings.
The firm’s internal rate of return (r), and its cost of capital
(k) are constant;
All earnings are either distributed as dividend or reinvested
internally immediately.
The firm has a very long or infinite life.
Prepared by Tishta Bachoo
19
20. Criticisms of Walter’s Model
The model does not consider all the factors affecting
dividend policy and share prices.
The model assumes that the investment opportunities
of the firm are financed by retained earnings only and
no external financing.
Firm’s internal rate of return does not always remain
constant. In fact, r decreases as more and more
investment in made. (income from investment)
Walter model on dividend policy ignored the business
risk of the firm, which has a direct impact on the value
of the firm. Thus, k cannot be assumed to be constant.
Prepared by Tishta Bachoo
20
21. Impact of Dividend Policy on Market
Price
EPS =$ 8
Dividend
Payout
r > ke r < ke r = ke
15% > 12% 10% < 12% 12% = 12%
Market Price (P) Market Price (P) Market Price (P)
0% 83 56 67
25% 79 58 67
50% 75 61 67
75% 71 64 67
100% 67 67 67
Dividend
Policy Zero Payout 100% Payout Payout 0% to 100%
Formula
P = D + r/ke (E-D)
Ke
Prepared by Tishta Bachoo
21
25. Gordon’s Model
• Gordon uses the dividend capitalization approach
to study the effect of the firms dividend policy on
the stock price.
• According to him, what is presently available is
more preferred that what may be available in the
future.
Prepared by Tishta Bachoo
25
26. Gordon’s Model
Gordon model assumes that the investors are
rational, they want to avoid risk.
They would prefer to pay a higher price for the
shares now which earn them current dividends
income .
In the same way, they would retain their earnings
if the company postpones dividends.
Again, the share price and the dividend depend on
the retention rate.
Prepared by Tishta Bachoo
26
27. Formula of Gordon’s Model
Where,
P = Market Price
E = Earnings per Share
b = Retention Ratio (100 % - % dividend payout
ratio)
K = Rate of return required by shareholders
r = Rate of return on investment
br = g = Growth Rate
P =
E (1 – b)
K - br
Prepared by Tishta Bachoo
27
28. Prepared by Tishta Bachoo
28
According to Gordon;
The firms with rate of return greater than the cost
of capital should have a higher retention ratio.
Firms which have rate of return less than the cost
of capital, should have a lower retention ratio.
The firms which have a rate of return equal to the
cost of capital will however not have any impact
on its share value, it can adopt any retention
policy.
29. Assumptions:
The firm is an all equity firm
Only financed by retained earnings
The internal rate of return (r) and the cost of
capital (k)of the firm is constant.
Constant Cost of Capital
The retention ratio (b), once decided upon, is
constant
Prepared by Tishta Bachoo
29
30. Criticisms of Gordon’s model
As the assumptions of Walter’s Model
and Gordon’s Model are same so the
Gordon’s model suffers from the same
limitations as the Walter’s Model.
Prepared by Tishta Bachoo
30
31. Illustration 2
The following data are available for Rogers Group.
Earnings per share: $ 40.00
Rate of Return on Investment: 20%
Rate of Return required by shareholders: 30%
If the Gordon valuation model holds, what will be the
price per share when the dividend payout ratio is
25%?
Prepared by Tishta Bachoo
31
34. Irrelevant Theory
According to this concept, investors do
not pay any importance to the dividend
history of a company and thus, dividends
are irrelevant and have no impact on the
value of a firm.
Prepared by Tishta Bachoo
34
35. Modigliani & Miller’s Irrelevance Model
Depends on
Depends on
Prepared by Tishta Bachoo
35
36. Modigliani & Miller’s
According to M & M, the value of the firm
remains the same whether or not the
company pays dividend.
The value of a firm depends solely on its
earnings power resulting from the investment
policy and not influenced by the manner in
which its earnings are split between
dividends and retained earnings.
Prepared by Tishta Bachoo
36
37. Formula of M-M’s Approach
Po =
( D1+P1 )
(1 + p)
Where,
Po = Market price per share at time 0,
D1 = Dividend per share at time 1,
P1 = Market price of share at time 1
p = Capitalization Rate
Prepared by Tishta Bachoo
37
38. Modigliani and Miller’s Approach
Assumption
Capital markets are perfect:- Investors are
rational, information is freely available,
transaction cost are nil, and no investor can
influence the market price of the share.
Taxes do not exist
The firm has a fixed investment policy
Prepared by Tishta Bachoo
38
39. Criticism of M-M Model
No perfect Capital Market
Lack of Relevant Information
The assumption that taxes do not exist
is far from reality.
No fixed investment Policy
Prepared by Tishta Bachoo
39
40. Summary
Dividend is the part of profit paid to
Shareholders.
Firm decide, depending on the profit, the
percentage of paying dividend.
Walter and Gordon says that a Dividend
Decision affects the valuation of the firm.
While the Traditional Approach and MM’s
Approach says that Value of the Firm is
irrelevant to Dividend we pay.
Prepared by Tishta Bachoo
40
42. Question 1
Expanda Ltd. had 50,000 equity shares of $ 10 each
outstanding on January 1. The shares are currently being
quoted at market price. In the wake of the removal of dividend
restraint, the company now intends to pay a dividend of $ 2 per
share for the current calendar year. It belongs to a risk-class
whose appropriate capitalization rate is 15%. Using MM model
and assuming no taxes, ascertain the price of the company's
share as it is likely to prevail at the end of the year (i) when
dividend is declared, and (ii) when no dividend is declared.
Prepared by Tishta Bachoo
42
44. Question 2
The following data are available for Phoenix
International.
Earnings per share: $ 10.00
Rate of Return on Investment: 20%
Rate of Return required by shareholders: 16%
If the Gordon valuation model holds, what will be
the price per share when the dividend payout
ratio is (i) 25%? (ii) 50%?
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44
46. Question 3
The following information is available about Benny
Musicals.
Earnings per share: $ 5.00
Rate of return required by shareholders: 16 %
Assuming that the Gordon valuation model holds,
what rate of return should be earned on
investments to ensure that the market price is $ 50
when the dividend payout is 40%?
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46
48. Question 4
The earnings per share of company are $ 8 and
the rate of capitalization applicable to the company
is 10%. The company has before it an option of
adopting a payout ratio of 25% or 50% or 75%.
Using Walter's formula of dividend payout,
compute the market value of the company's share
if the productivity of retained earnings is (i) 15% (ii)
10% and (iii) 5%
Prepared by Tishta Bachoo
48
49. Question 5
The following information is available for Avanti
Corporation.
Earnings per share: $ 4.00
Rate of return on investments: 18%
Rate of return required by shareholders: 15%
What will be the price per share as per the Walter
model if the payout ratio is (i) 40%? (ii) 50%? (iii)
60%?
Prepared by Tishta Bachoo
49
50. Question 6
ABC Ltd. had 100,000 equity shares of $ 20 each outstanding on
January 1. The shares are currently being quoted at market price. In
the wake of the removal of dividend restraint, the company now
intends to pay a dividend of $ 5 per share for the current calendar
year. It belongs to a risk-class whose appropriate capitalization rate
is 20%. Using MM model and assuming no taxes, ascertain the price
of the company's share as it is likely to prevail at the end of the year
(i) when dividend is declared, and (ii) when no dividend is declared.
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50
51. END OF SESSION
It was a pleasure to work with
you all
ENJOY YOUR TUITION FREE
WEEKS
Prepared by Tishta Bachoo
51
52. Tishta Bachoo
Lecturer in Accounting
Charles Telfair Institute
Tel: 401-6511 | Fax: 433-3005
Email: tishta.bachoo@telfair.ac.mu
52
Prepared by Tishta Bachoo
Editor's Notes
Rate of return &gt; cost of capital
What if the company does not have enough retained earnings?
When return on investment is more than cost of capital- we cannot pay dividend- zero dividend
When return on investment is less than cost of capital- we can pay 100% dividend
When return on investment is equal to the cost of capital- we can choose our payout ratio.
Ignore currency (Indian Rupee)= replace it by Dollar ($)
Optimum means when the Return on investment is the highest compared to the cost of capital.
High rate of return means share price will increase.
Share price increases, dividend payout ratio decreases to Nil (Zero)
They argue that the value of the firm depends on the firm’s earnings which result from how much the firm is investing and not on how much dividend it is giving.