Use BookMyEssay:Walter and Gordon Model Assignment Help

Walter and Gordon's model helps to explain two very important theories of the finance domain. These theories are outlined to clear out the relation between dividends and the valuation of a firm.

Walter’s formula to determine the market price per share (MPS) is as follows:

P = D/K + r(E-D) /K/K

Assumptions of Walter’s Model

There are certain assumptions of Walter's model that are discussed briefly below:

• All the investments are financed through retained earnings only by the firm. In this case, no new equity or debt is issued.
• The internal rate of return (r) and the cost of capital (k) of the firm are constant.
• All earnings of the firm are distributed immediately as dividends or reinvested internally.
• The earnings at the beginning are never changing. The values of the earning per share (E) and dividend per share (D) may be changed in the model for ascertaining results. In this case, any given values of E and D are assumed to be constant always to determine a given value.
• The firm has an infinite or very long life.

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Introduction to Gordon’s Model

Myron Gordon developed a very well-known model that is unambiguously related to the market value of the firm and dividend policy. The three major keys of the model are dividend per share, the required rate of return, and the growth rate in dividends per share.

Assumptions of Gordon’s Model

There are certain important assumptions of Gordon’s model that are discussed below:

• The firm is assumed to be an Equity based firm.
• No external sources of financing are available.
• The business model of the company is stable that is there are no changes in its operations.
• The internal rate of return (r) of the firm is never changing that is constant.
• The appropriate rate of discount (K) of the firm remains unchanged.
• There is no existence of corporate taxes.
• The life of the firm is perpetual as well as its earnings are also never-ending.
• The retention ratio (b) of the firm is constant from the time it was decided upon. So the growth rate (g) = br always remains the same.
• K>br = g, if this condition is not satisfied then the value of a share cannot be determined. As per Gordon’s dividend capitalization model, the market value of the share is equal to the present value of an everlasting dividend stream.

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