Financial
Lintner Dividend Smoothing Model formula: partial adjustment to target payout
Explore a simplified, zero-intercept dividend partial-adjustment model with explicit parameter bounds.
Model a partial adjustment, not a dividend promise
The simplified illustration sets the intercept and error term to zero: new dividend = prior dividend + adjustment speed*(target payout*EPS-prior dividend). It illustrates Lintner-style partial adjustment, not a fitted empirical forecast or a universal corporate policy.
Speed and target payout are restricted to [0,1] here; prior dividend and EPS must be nonnegative. These are this exercise's modeling bounds, not universal accounting limits. Loss-making periods need a separate dividend-policy model.
The prior dividend is not a floor: when target payout*EPS is lower, this equation reduces the dividend. Adding a no-cut floor would be a different policy. Over repeated periods with constant parameters, the recursion weights past earnings and the starting dividend; it does not establish cash availability or board approval.
| Dividend Policy Input | Cell | Corporate Forecast | Per-Share Result |
|---|---|---|---|
| Prior Year Dividend D_{t-1} | B2 | $2.00 / share | Previous-period dividend |
| Current Year EPS_t | B3 | $6.00 / share | Strong earnings surge |
| Target Payout Ratio tau | B4 | 50% (0.50) | Target D* = $3.00 (+$1.00 gap) |
| Adjustment Speed c | B5 | 30% (0.30) | D_t = $2.00 + 0.30*($1.00) = $2.30 |
Modeled current-period dividend per share
The equation closes the specified fraction of the target gap in the current period. ROUND displays cents; the payout ratio below uses the unrounded modeled dividend.
=IF(COUNT(B2:B5)<>4,"Invalid inputs",IF(OR(B2<0,B3<0,B4<0,B4>1,B5<0,B5>1),"Invalid inputs",ROUND(B2 + B5 * (B4 * B3 - B2), 2)))Implied actual current-year payout ratio D_t / EPS_t
The ratio is undefined at zero EPS. A positive dividend with low positive EPS can give a payout ratio above 100%; this equation imposes no affordability constraint.
=IF(COUNT(B2:B5)<>4,"Invalid inputs",IF(OR(B2<0,B3<0,B4<0,B4>1,B5<0,B5>1),"Invalid inputs",IF(B3=0,"Undefined (EPS = 0)",ROUND((B2 + B5 * (B4 * B3 - B2)) / B3, 4))))Try the example
Use the original values or change them to test your understanding.