4/7/2024 0 Comments Gordon equation financeThis relationships are shown in the figure below. Therefore, the higher is dividend payout rate, the hire is stock’s price. The basic idea behind the bird-in-hand theory by Gordon and Linntner is that low dividend payout leads to increase in cost of capital. Where D 0 is the per share amount of last dividend paid, g is constant growth rate, k e is investors’ required rate of return, D 1 is expected dividend. Myron Gordon developed the model describing the relationship between the stock’s price and the dividend also known as the Gordon growth model or dividend discount model. The company’s cost of capital is constant and greater than growth rate.there is constant growth rate of earnings The only source of finance is retained earnings, any other sources of financing are not available.The company is financed by equity only, i.e.The bird-in-hand theory by Gordon and Lintner is based on following assumptions: Conversely, Gordon and Lintner insist that dividend affect the stock’s price and investors’ behavior. The last one states that dividend policy has no impact on the value of a company or its capital structure. The bird-in-hand theory of dividend policy were developed by Myron Gordon and John Lintner in response to the dividends irrelevance theory by Modigliani and Miller.
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