# Understanding Walter's Dividend Policy Model

I'm trying to understand the justification for the mathematical formulation of the Walter model (1956), which provides an equation for the price of a stock based on present value of dividends and reinvestment of retained earnings. The equation is given by

$$P = \frac{D}{K} + \dfrac{\frac{R(E-D)}{K}}{K}$$,

where $$P$$ is the price, $$D$$ is the dividend, $$R$$ is the return on additional investment, $$E$$ is earnings, and $$K$$ is the cost of equity (i.e. required return).

I understand that $$D/K$$ reflects the present value of an infinite perpetuity. I also understand that $$R(E-D)$$ is the income obtained from reinvestment of retained earnings.

What I do not understand is why we end up with $$K^2$$ in the denominator of the second term. It seems to me that $$R(E-D)/K$$ is the present value of a stream of reinvestment income paid out to shareholders - this what I thought we wanted.

Dividing by $$K$$ suggests that shareholders are paid a stream of present values. This is specifically what I do not understand.