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# Lintners Model and Radical approach

## Lintners Model and Radical approach

The classic study of the actual dividend behavior was  done by John Lintner in 1956. The study was conducted in two stages. First, he conducted a series of interviews with businessmen to form a view of how they went about their dividends decisions. He then formed a model on the basis of those interviews which could be tested on a larger data. His formula is

Lintner’s Model

D1 = D0 + [(EPS X Target Payout) – D0] X AF

Where

D1 = Dividend in year 1

D0 = Dividend in year 0

EPS = Earning Per Share

Lintner model has two parameters:

(1) The target pay-out ratio and

From the interviews he conducted, it emerged that investment needs were not a major consideration in the determination of dividend policy, rather the decision to change the dividend was usually a response to a significant change in earnings which had disturbed the existing relationship between earnings and dividends. Lintner concluded that

(1) Companies tend to set long run target dividends-to-earning ratios according to the amount of positive net present value (NPV) project that are available.

(2) Earning increases are not always sustainable. As a result, dividend policy is not changed until managers can see that new earnings level are sustainable.