Predicated on Gordon’s model, industry value of a portion is equivalent to today’s worth of a boundless upcoming blast of dividends.
Whenever roentgen > A great, the importance for every share P develops once the preservation proportion, b, increases, we.age., P grows having reduction of bonus spend-aside proportion. In short, lower than this problem, the firm is to dispersed faster returns and may keep high money.
When r<k, the value per share P decreases since the retention ratio b, increases, i.e., P increases with increase in dividend pay-out ratio. It can be proved that the value of b increases, the value of the share continuously falls.