8:20 AM
Gordon
talks about the extreme about the extreme situation. According to Gordon, there
are two types of investor exist in the market. One who wants some current
income and other is who want capital income. While according to another model
of Dividend that’s Walter model, ignore this. Every investor wants some
interest in their hand from the investment amount. Gordon says that company has
to pay some interest to their investor. This helps in attracting new investor
in the company and existing investor satisfy more from the company.
Gordon Dividend Model chart
Company situation
|
Retained earning
|
Dividend pay out ratio
|
Growth
|
High
|
Low
|
Normal
|
Any Ratio
|
Any Ratio
|
Depression
|
Low
|
High
|
In
normal condition, company has any ratio of Retained earning and Dividend pay
out ratio because it does not effect performance of the company. Retained
earning should be low in depression because future is uncertain.
P = E ( 1- b)
K- br
b
= Retention Ratio
K
= Cost of capital
br
= Growth rate of the firm
if
retention ratio high discount rate is also high because investor discount the
future value earnings while estimate the market price.
Assumption :
1. Firm has infinite period.
2. Firm does not use external borrowing. It depends only
on equity capital.
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