Question

Who formulated the following model for estimating the market price of equity share?
$P=\frac{D+\frac{R_a}{R_c}(E-D)}{R_c}$
Where, $P=$ Market price of equity share
$D=DPS$
$E=EPS$
$E-D=$ Retained earning per share
$R_a=$ Internal rate of return on investment
$R_c=$ Cost of capital.

• A. Modigliani-Miller
• B. Myron-Gordon
• C. James E. Walter
• D. Clarkson and Elliot

Answer 1

Answer: (C)

James E. Walter

Professor James E. Walter that the choice of dividend policies almost always affects the value of the enterprise. His model shows clearly the importance of the relationship between the firm’s internal rate of return (r) and its cost of capital $\left(k\right)$ in determining the dividend policy that will maximize the wealth of shareholders.

Walter’s formula to calculate the market price per share (P) is:

$P=\frac{\frac{D}{k}+\frac{E-D}{k}\times r}{k}$

P = market price per share
D = dividend per share
E = earnings per share