Walter's Model for Optimum Dividend Payout Ratio Quiz

Gordon Growth Model

• The Gordon Growth Model is used to estimate the P/E ratio.
• 'g' in the Gordon Growth Model represents the expected long-run growth rate of the company's earnings.

Security Valuation

• In the context of Security Valuation, 'D1' represents the expected dividend per share.
• The Return on Equity (ROI) is calculated using the Gordon Growth Model.

Walter's Model

• The optimal dividend pay-out ratio is achieved when the return on investment exceeds the cost of equity capital.
• If the dividend pay-out ratio is zero, the market value of a company's share will decrease.

Company Data

• The cost of equity capital (Ke) for the company is 16%.
• The total dividend amount distributed by the company is $100,000.
• The Dividend per share for the company is $2.
• The Earnings per Share (EPS) for the company is $8.
• The Dividend per Share (DPS) for the company is $2.
• The expected long-run growth rate for the company's earnings is 18%.
• The Price/Earning (P/E) ratio at which the company is currently trading is 12.5.

Variations

• If the Price/Earning ratio is 8 instead of 12.5, the new cost of equity capital (Ke) for the company would change.
• If the growth rate is assumed to be 15%, the Cost of Equity (Ke) capital for the company would change.
• The Market Price (MP) per share is calculated based on the Cost of Capital and the Growth Rate.

Test your knowledge on Walter's model which calculates the market price per share based on earnings, dividends, return on investment, and cost of equity capital. Understand how the price per share changes with different dividend payout ratios according to the model.