DIVIDEND THEORIES

WATLERS MODEL
Supports the doctrine that dividend decisions are relevant and affect the value of the firm The model is based on relationship between
a) Internal rate of return or return on investment (r) b) Cost of capital or required rate of return (k)

 Here the model divides firms into 3 groups a) Growth firms ( r > k) b) Normal firms ( r = k) c) Declining firms ( r < k)

Assumptions
Internal financing Constant rate of return nd cost of capital

100% payout or retention

Infinite time Constant EPS and DPS

WALTERS FORMULA
P = D + r(E D)/ Ke Ke Where, P= market price per share D= dividend per share r= internal rate of return E= earnings per share Ke= Cost of equity capital

Conclusions
Optimum payout ratio is nil case of growth firms Payout ratio is irrelevant in case of normal firms Payout ratio is 100% in case of declining firms

Criticisms
No enternal financing Constant rate of return Constant oppurtunity cost of capital