Question

Explain the Walter’s share valuation formula based on dividend. How is Gordon’s formula different from Walter’s formula?

Answer 1

Answer:

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Answer 2

WALTER’S VALUATION FORMULA BASED ON DIVIDENDS:

The firm’s value depends on dividends that relies on the capital cost and return rates. The formula for market price per share proposed by James E Walter is

$P=\frac{D}{K}+\frac{\left\{r \times \frac{(E-D)}{K}\right\}}{K}$

Where,

P = Share price

D = Dividend per share

K = Equity cost

E = Earning per share

r is return rate on investment

The dividend decision model by James E Walter proposes that if equity cost is lesser than return on investment, to maximize market value the firm must initiate high dividend-pay-out ratio. And through the dividend equalization model, Gordon says that dividend is preferred even when $r=K$ which is contrary to the Walter’s model.