# Equity Distribution Logic

This article explains **equity distribution logic** in Model Reef, focusing mainly on dividends.

You will learn:

* How dividends and other equity distributions are represented.
* How they affect retained earnings and cash.
* How they fit into the cash priority sequence.
* How they interact with valuation and equity returns.

Equity distributions are usually the last call on free cash after mandatory obligations.

***

## 1. Representing equity distributions

Equity distributions are modelled using **Dividend variables**.

You can configure dividends as:

* Fixed cash amounts by period.
* A percentage of NPAT.
* A percentage of opening or closing equity.
* A residual that targets a specific cash balance or payout ratio (implemented via formulas).

There is no separate dividends expense in P\&L, as dividends are distributions of equity, not operating costs.

***

## 2. Dividends across the statements

Across the statements:

* **P\&L**
  * Dividends do not appear. They do not affect NPAT directly.
* **Balance Sheet**
  * Dividends reduce retained earnings and cash when paid.
  * There is no separate dividends payable line by default. Effects are treated as immediate for modelling purposes.
* **Cashflow Statement**
  * Dividends appear as Financing cash outflows.
* **Cash Waterfall**
  * Dividends are shown near the end of the waterfall, after debt service and capex.

This makes the trade off between reinvestment and distribution visible to stakeholders.

***

## 3. Position in the cash priority stack

In the Cash Waterfall sequence, dividends come after the following items:

{% stepper %}
{% step %}

### Operating cashflows and working capital movements

These are the primary inputs to free cash.
{% endstep %}

{% step %}

### Tax and necessary capex

Mandatory outflows to the government and required reinvestment in the asset base.
{% endstep %}

{% step %}

### Interest paid and contractual debt repayments

Obligations to lenders are met before equity distributions.
{% endstep %}
{% endstepper %}

This ordering reflects a typical economic priority:

* Keep the business operating.
* Maintain or grow asset base.
* Meet obligations to lenders.
* Then distribute remaining free cash to equity.

Model Reef does not automatically prevent you from modelling dividends that exceed free cash, but any resulting funding gaps or negative cash balances will be visible.

***

## 4. Equity distributions and valuation

Equity distributions matter for valuation because:

* Free cashflows to equity represent the cash that could be paid out to owners after all obligations and reinvestment.
* Actual dividends modelled in the scenario give one view of realised equity cashflows.
* The valuation engine uses FCFE and terminal value rather than observed dividends by default, but you can reconcile the two if needed.

Different scenarios can use different dividend policies to test growth vs payout trade offs.

***

## Related articles

* [Wholesale, Distribution & B2B Trade](/use-cases/wholesale-distribution-and-b2b-trade.md)
* [Build a Terminal Value Model](/how-tos/valuation/build-a-terminal-value-model.md)
* [IRR Calculation](/help/financial-outputs-and-valuation/irr-calculation.md)
* [Editing Units](/syntax/how-input-fields-work/editing-units.md)


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