# Lintner's Model
Lintner's model explains how firms smooth their dividends over time rather than letting them swing with earnings. It is used to compute $D_1$ (the dividend to be paid this year).
## Two parameters
1. Target payout ratio — the long-run proportion of earnings the firm wants to pay out.
2. Speed/spread of adjustment — how quickly the current dividend moves toward the target.
## Key idea
The current year's dividend depends on both the current year's earnings and last year's dividend. Managers are reluctant to cut dividends because a fall in dividend signals trouble to the market — so they adjust only partially toward the target each year.
## Formula
$$D_1 = D_0 + \big[(EPS \times \text{Target payout}) - D_0\big] \times A_f$$
| Symbol | Meaning |
|---|---|
| $D_1$ | Dividend in year 1 |
| $D_0$ | Dividend in year 0 (last year's dividend) |
| $EPS$ | Earnings per share |
| $A_f$ | Adjustment factor / speed of adjustment |
The term $(EPS \times \text{Target payout})$ is the target dividend; the firm closes only a fraction $A_f$ of the gap between the target and last year's dividend.