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244 Corporate Finance BRILLIANT’S

opportunities to invest the earnings. Such firms BZdoñQ>_oÝQ> Anm°À`y©{ZQ>rO Zht hmoVrŸ& Bg àH$ma H$s \$åg©
will earn on their investment less than the AnZo BZdoñQ>_oÝQ> na BZdoñQ>g© Ûmam Amdí`H$ {_{Z__
minimum rate required by investors. The in- aoQ> go H$_ A{O©V H$aVr h¡Ÿ& Bg àH$ma H$s \$åg© Ho$
vestor of such firms would like that earning
BZdoñQ>g© `h MmhVo h¢ {H$ A{Zª½g H$mo CZ_| {dV[aV {H$`m
should be distributed to them so that they
OmZm Mm{hE Vm{H$ do hm`a [aQ>Ýg© àmá H$aZo Ho$ {cE Cgo
may invest elsewhere to get higher returns.
Xygar OJh BZdoñQ> H$a gHo$Ÿ& O~ r < K h¡ Vmo noAmCQ>
The market value per share increases as the
payout increases when r < K. ~‹T>Zo Ho$ gmW à{V eo`a H$s _mH}$Q> d¡ë`y ^r ~‹T>Vr h¡Ÿ&
Assumptions _mÝ`VmE§
Walter's model is based on the following dmëQ>a H$m _m°S>c {ZåZ{c{IV _mÝ`VmAm| na AmYm-
assumptions: [aV h¡:
(i) The firm finances all investments through (i) A{Zª½g H$mo gwa{jV aI H$a \$_© g^r BZdoñQ>_oÝQ²>g
retained earnings. Debt or new equity Ho$ {cE \$m`ZoÝg àXmZ H$aVr h¡& S>oãQ> `m Z`r
capital is not issued. B{ŠdQ>r H¡${nQ>c Bí`y Zht H$s OmVr h¡Ÿ&
(ii) The firm's internal rate of return (r) and (ii) \$åg© Ho$ [aQ>Z© H$s BÝQ>aZc aoQ> (r) Ed§ H¡${nQ>c H$s
cost of capital (K) are constant. H$m°ñQ> (K) XmoZm| pñWa hmoVo h¢Ÿ&
(iii)All earnings are either distributed as (iii)g^r A{Zª½g `m Vmo {S>{dS>oÝS> Ho$ ê$n _| {dV[aV H$s
dividend or reinvested immediately. OmVr h¡ `m VËH$mc [aBÝdoñQ> H$s OmVr h¡Ÿ&
(iv)The value of the Earnings Per Share (EPS) (iv)A{Zª½g na eo`a (EPS) Ed§ {S>{dS>oÝS> na eo`a (DPS)
and the Dividend Per Share (DPS) may be
H$s d¡ë`y _m°S>c Ho$ ^rVa n[ad{V©V hmo gH$Vr h¡
changed in the model but any given values
naÝVw `h _mZm OmEJm {H$ EPS `m DPS H$s Xr JB©
of EPS or DPS are assumed to remain
constant forever in determining a given d¡ë`y {H$gr d¡ë`y H$mo kmV H$aZo _| h_oem pñWa
value. ahoJrŸ&
(v) The firm has perpetual or very long life. (v) \$_© H$s AZÝV `m ~hþV bm°§J bmB\$ h¡Ÿ&
Walter's formula to calculate market price à{V eo`a H$s _mH}$Q> àmBO kmV H$aZo Ho$ {cE dmëQ>a
per share: H$m \$m°_y©cm:

r
DPS  EPS DPS 
K
P 
K
Where, P = Market price per share. DPS = Dividend Per Share.
EPS = Earning Per Share r = Internal rate of return.
K = Cost of capital or capitalization rate.
Illustration 3.2.1

Capitalisation rate / H¡${nQ>bmBOoeZ aoQ> (K) = 10%
Earnings Per Share / A{Zª½g na eo¶a (EPS) = ` 10
DPS (a) 0% (b) 40% (c) 80% (d) 100%