Walters Model

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 Walter's Model, also known as the Walter's Dividend Model, is a financial model that estimates the intrinsic value of a stock based on its dividend payments and growth rate. The model was developed by James E. Walter in 1956.


*Formula:*


The Walter's Model formula is :


P = D / (r - g) + (D * g) / (r * (r - g))


Where:


- P = Current stock price

- D = Expected dividend per share

- r = Required rate of return (cost of equity)

- g = Expected growth rate of dividends


*Assumptions:*


1. Constant dividend growth rate : The model assumes that dividends will grow at a constant rate forever.

2. Constant required rate of return :  The model assumes that the required rate of return (cost of equity) remains constant.

3. Infinite time horizon : The model assumes that the company will continue to pay dividends forever.


*Example:*


Suppose we want to estimate the intrinsic value of a stock with the following parameters:


- Expected dividend per share (D) = $5

- Required rate of return (r) = 10%

- Expected growth rate of dividends (g) = 5%


Using the Walter's Model formula, we get:


P = $5 / (0.10 - 0.05) + ($5 * 0.05) / (0.10 * (0.10 - 0.05))

P = $100 + $25

P = $125


Therefore, the estimated intrinsic value of the stock is $125.


*Strengths and Limitations:*


Strengths:


1. More accurate than Gordon Growth Model : Walter's Model is considered more accurate than the Gordon Growth Model because it takes into account the growth rate of dividends.

2. Useful for dividend-paying stocks : The model is particularly useful for estimating the intrinsic value of dividend-paying stocks.


Limitations:


1. Assumes constant growth rate : The model assumes that dividends will grow at a constant rate forever, which may not be realistic.

2. Ignores other factors : The model ignores other factors that may affect the stock's value, such as interest rates, inflation, and market sentiment.

3. Sensitive to input parameters : The model is sensitive to the input parameters, particularly the required rate of return and the growth rate of dividends.

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