Walter’s Theory.

Slides:

Advertisements

Similar presentations

Chapter 13. Dividend Policy and Internal Financing.

Advertisements

Chapter 7 Dividend Policy Meaning of Dividend Dividend refers to the business concerns net profits distributed among the shareholders. It may also be termed.

Revise Lecture 26.

1 CHAPTER FIFTEEN DIVIDEND DISCOUNT MODELS. 2 CAPITALIZATION OF INCOME METHOD THE INTRINSIC VALUE OF A STOCK –represented by present value of the income.

Corporate Finance Stock Valuation Prof. André Farber SOLVAY BUSINESS SCHOOL UNIVERSITÉ LIBRE DE BRUXELLES.

Stock Return & Valuation. Techniques of Fundamental Equity Valuation Balance Sheet Techniques – Book Value – Liquidation Value – Replacement Cost Discounted.

Dividend Policy. Contents Introduction Influencing factors Dividend Distribution Theories – Walter Model Gordon Model Modigliani Miller Model Stability.

Payout Policy Advanced Corporate Finance 2 October 2007.

CHAPTER SEVENTEEN THE VALUATION OF COMMON STOCK. CAPITALIZATION OF INCOME METHOD n THE INTRINSIC VALUE OF A STOCK represented by present value of the.

FINANCE 5. Stock valuation - DDM Professor André Farber Solvay Business School Université Libre de Bruxelles Fall 2006.

Intro to Financial Management Dividend Policy. Review Homework Income stream risks Business risks Operating risk –Break-even analysis –Operating leverage.

1 Chapter 9: Valuation of Common Stocks Copyright © Prentice Hall Inc Author: Nick Bagley, bdellaSoft, Inc. Objective Explain equity evaluation.

DIVIDEND POLICY TRADITIONAL MODEL (GRAHAM & DODD)

C hapter 9 Valuation of Common Stock 1. Reading Stock Listings pp. 235 New York Stock Exchange Listing 52 Weeks Hi Lo Stock Sym Div Yid% P/E Vol100s Hi.

DIVIDEND VALUATION AND EARNING CAPITALISATION MODEL.

Stock Valuation Chapter 9.1,9.2.

V Unit DIVIDEND THEORIES Dividend decision determines the amount of earnings to be distributed to share holders and the amount to be retained in the firm.

Dividend decision and valuation of firms.

Stock Valuation The price of stocks in the market place is the present value of the cash flows that stockholders have claim to: These cash flows consist.

Théorie Financière 4. Evaluation d’actions et d’entreprises

Lecture 7 The Value of Common Stocks Managerial Finance FINA 6335 Ronald F. Singer.

Bond and Stock Valuation The market value of the firm is the present value of the cash flows generated by the firm’s assets: The cash flows generated by.

FINANCE 5. Stock valuation – DDM & FCFM Professor André Farber Solvay Business School Université Libre de Bruxelles Fall 2007.

FINANCE 6. Stock valuation - FCFM Professor André Farber Solvay Business School Université Libre de Bruxelles Fall 2006.

Théorie Financière Evaluation d’actions et d’entreprises Professeur André Farber.

PROJECT ON VALUATION OF SHARES. The cost of capital of a firm is the minimum rate of return expected by its investors. The capital used by a firm may.

Stock Valuation Chapter 9.1,9.2. Outline Investing in stocks – Capital gains, dividend yield, return The Constant Dividend Growth Model The Dividend and.

RELEVANCE OF DIVIDEND According to this concept, dividend policy is considered to affect the value of the firm. Dividend relevance implies that shareholders.

Chapter 10 Profitability and Return on Investment.

FIN 819: lecture 2'1 Review of the Valuation of Common Stocks How to apply the PV concept.

The cost of capital is the single most important financial decision-making. Cost of capital is an integral part of investment decision as it is used to.

Chapter 2- Capital Structure Determination. After studying this chapter, you should be able to: Define “capital structure.” Explain the net operating.

CORPORATE FINANCE Week 4 – 17&19 Oct Stock and Company Valuation – Dividend Growth Model, Free Cash Flow Model I. Ertürk Senior Fellow in Banking.

Equity Valuation Dividend Discount Method with constant earnings growth rate 1.

Chapter 14 EQUITY VALUATION How to Find Your Bearings.

Comm W. Suo Slide 1. comm W. Suo Slide 2  Basic Types of Models Balance Sheet Models Dividend Discount Models Price/Earning Ratios 

DIVIDEND THEORY CHAPTER 17. LEARNING OBJECTIVES  Highlight the issues of dividend policy  Critically evaluate why some experts feel that dividend policy.

Chapter 7 Valuing Stocks TOPICS COVERED Stocks and the Stock Market Valuing Common Stocks Simplifying the Dividend Discount Model Growth Stocks and Income.

Amity School Of Business 1 Amity School Of Business BBA Semister four Financial Management-II Ashish Samarpit Noel.

 Dividend Valuation Model: ◦ Assume Re 1 share quoted at Rs. 2.50, dividend just paid Rs

Business Finance (MGT 232)

Cost of Capital. n For Investors the rate of return on a security is a benefit of investing. n For Financial Managers that same rate of return is a cost.

Stock Valuation 1Finance - Pedro Barroso. Present Value of Common Stocks The value of any asset is the present value of its expected future cash flows.

Dividend Theory. Issues in Dividend Policy Earnings to be Distributed – High Vs. Low Payout. Objective – Maximize Shareholders Return. Effects – Taxes,

Cost of Capital Raising funds to pay for capital projects.

Dividend Policy

Lecture 3 How to value bonds and common stocks

Amity Business School Amity School Of Business BBA Semister four Financial Management-II Ashish Samarpit Noel.

Cost of Equity (Ke).

FINANCING DECISIONS How to Finance Assets

Chapter 4 The Value of Common Stocks Principles of Corporate Finance

FINANCIAL MANAGEMAENT

Describe Linear Technology’s payout policy

Dividend The term dividend refers to that part of profit of a company which is distributed by the company among it’s shareholder.

THE COST OF CAPITAL.

Mark Fielding-Pritchard

Dividend The term dividend refers to that part of profit of a company which is distributed by the company among it’s shareholder.

Profitability and Return on Investment

FINANCE 5. Stock valuation - DDM

Final Review FIN3701.

Fin 301-Stocks Valuation | Dr. Menahem Rosenberg

Common Stock Valuation

Valuation: The value of control

ობლიგაციებისა და აქციების შეფასება

Lecture 4 The Value of Common Stocks

Valuing Stocks -- Summary of Formula

Dividend Policy Part II Ernesto S. Nogoy Jr. MBA- FM.

Investments: Analysis and Management Common Stock Valuation

Presentation transcript:

Walter’s Theory

Dividend Theory

Issues in Dividend Policy Earnings to be Distributed – High Vs. Low Payout. Objective – Maximize Shareholders Return. Effects – Taxes, Investment and Financing Decision.

Walters Model Assumptions Valuation Optimum Payout Ratio Criticism

Assumptions Internal Financing- debt or new equity is not issued. Constant Return and Cost of Capital 100% Payout or Retention Constant EPS and DIV – beginning earnings and dividends never change. Infinite Time – The firm has a very long or infinite life

Optimum Payout Ratio Growth Firms – Retain all earnings ( r>Ke) Ample opportunities yielding higher returns than opportunity cost of capital. These firms are able to reinvest earnings at a rate (r) which is higher than Ke. Optimum pay out ratio is Zero. Normal Firms – ( r= Ke) No effect Most of the firms do not have unlimited surplus generating investment opportunities. r=Ke , the dividend has no effect on market value per share in Walter’s model. No unique optimum pay out ratio for normal firm. Declining Firms – Distribute all earnings (r < Ke) Some firms do not have any profitable investment opportunities to invest earnings. Optimumpay out ratio for declining firm is 100%

Valuation Market price per share is the sum of the present value of the infinite stream of constant dividends and present value of the infinite stream of capital gains. r D + ------- (E-D) Ke P = ------------------------- P= market price per share r= internal rate of return Ke = cost of equity capital D= Dividend E=Earning per share.

Problem Given the following information about Z ltd., show the effect of the dividend policy on the market price of its shares, using Walter’s model. Equuity capitalization Rate Ke =12% EPS=Rs.8 Assume return on investment are as follows: r=15% r = 10% Dividend pay out ratios : Zero, 25%, 50%, 75% and 100%

D/P =0 DPS =0 0+(0.15/0.12)(8-0) P= ------------------------- 0.12 = Rs.83.3

Solution 1. r=15%, Ke=12% D/P =0 DPS =0 0+(0.15/0.12)(8-0) = Rs.83.3 2. D/P =25% DPS =2 (8*25/100) 2+(0.15/0.12)(8-2) = Rs.79 3. D/P =50% DPS =4 4+(0.15/0.12)(8-4) P= ------------------------- 0.12 = Rs.75 2. D/P =75% DPS =6 (8*50/100) 6+(0.15/0.12)(8-6) = Rs.71 3. D/P =100% DPS =6 (8*100/100) 8+(0.15/0.12)(8-8) = Rs.66.66

r=10%, Ke=12% 1.Rs.56 -0 2. Rs.61-50% 3.Rs.67-100% 4. Rs. 58-25%

Criticism No external Financing Constant Rate of Return Constant opportunity cost of capital