1

INTRODUCTION

1.1 Background

The price of share is highly influenced by the company’s dividend policy and the

dividend decision itself is also affected by other financial variables as well the

expected dividend of a company paying higher dividend is higher eventually the price

of share of the company goes up but contradiction, a company paying higher cash

dividends can suffer from the scarcity of funds for financing the corporate growth as a

result the share price comes down. The effect of dividend policy on stock price is

developed stock market has also been widely suited by finance scholars. They have

stressed on the important of dividend behavior by corporate firms. So need has been

felt to study and understand corporate dividend behavior and practices of corporate

firms in developing stock market like Nepal.

1.2 Problem Statement

Dividend policy being one of the major decisions to be taken by firm has not become

a well-known phenomenon or a matter or practice to a larger number of financial

communities even today. Dividend decision is crucial as well as controversial area of

financial management. Besides, it is not clearly understood by a larger segment of the

financial community. No matter how many studies have been conducted in this regard

the effect of dividend policy on a corporation’s market value has remained a subject

of long standing controversy. The focus of the study is to deal with the following

problems;

 What are the major factors affecting dividend policy of a firm?

 Is DPS proportionate to the firm’s EPS?

 What is the impact of dividend policy on market price of stock?

1.3 Objectives

The major objective of the study is to obtain the depth knowledge about the impact of

dividend policy adopted by the firms to its market price of share as well as the overall

valuation of the firm. The following are the specific objectives of this study.

 To find out the impact of divided policy on market price of stock

 To know the prevailing policies and practices regarding dividend in the Nepalese

firms with reference to the sample firm.

 To know if there is any uniformity in DPS, EPS, MPS and DPR of the sample

firms.

1.4 Rationale

The dividend is most sensitive element in the area of investment in the common stock.

If the market does not receive its expected dosage, stock price will suffer. Dividend

payout of course reduce the amount of earning retain in the firm and affect the total

amount of internal financing. The study may deliver crucial information for those

respective commercial banks are made. The main significance of study is as follows;

 The study aims to provide important and useful information to the investor.

 It will useful for stockbroker, financial agencies, policy makers and various

stakeholders.

 This study helps to formulate dividend policy to the policy maker while making

their dividend policy.

1.5 Related Literature Review

1.5.1 Conceptual Review

It is the first part of review of literature. This review consists of theoretical review

from textbook, reference books and practice in dividend policy and its impact on

market prices of stock. "The functions of finance involve three major decisions a

company must make: the investment decision, financing decision, and the dividend

decision. Each must be considered in relation to firm's objective; an optimal

combination of the three will create value" (James S. Van Horne, 1929).

Dividend refers to a portion of earning, which is distributed to shareholders in return

of their investment in share capital. It is the periodic payment made to the

shareholders to compensate them for the use of and risk to their investment. The

important aspect of dividend policy is to determine the amount of earnings to be

distributed to shareholders and the amount to be retained in the firm. Retained

earnings are the most significant sources of financing the growth of the firm. On the

other hand, dividends may be considered desirable from shareholders' point of view,

as they tend to increase their current wealth. Dividend policy refers to the policy,

which segments the earnings to retention amount of dividend. Dividend policy

determines the ratio of earnings to be retained and pay out. As the dividend payment

and retained earnings have inverse relationship, all the problems regarding dividend

payment and retention of earning is closely examined before applying appropriate

dividend policy. Higher dividend payout reduces the retention amount, which affects

the internal financing on the other hand lower dividend payout affects market, price of

stock. The decision regarding dividend payment depends upon the objective of the

firm.
 4

"Most of the investors expect dividend to continue in each year as well as to receive

price when they sell the stock." The expected final stock price includes the returns of

the original investment plus a capital gain. If the stock is actually sold at price above

its purchase price, the investor will receive a capital gain as such the shareholders

expect an increase in market value of the common stock over time. At the same time,

they also expect firm's earning in a form of dividend. So the shareholders may satisfy

with dividend or capital gain. "Financial Manager is therefore concerned with the

activities of corporation that affect the well being of stockholders. That well being can

be partially measured by dividend received but a more accurate measure is the market

value of stock."(J. Fred Weston, Eugene F. Brigham, 1989)

1.5.2 Review of Previous Work

Chawala and Srinivasan (2011) in his Articles, “Impact of Dividend and Retention on

Share Price.” They took 18 Chemicals and 13 sugar companies and estimated cross

section relationship for the year 1969 and 1973. The basic objectives of the study

were to set a model to explain share prices, dividend and retained earnings

relationship, to test the dividend and retained earnings hypothesis, to examine the

structural changes in estimated relations over time and to achieve above mentioned

objectives they used simultaneous equation model as developed by (Friends and

Puckett in 1964).

Ojha (2012), in his articles “A study on Dividend policy of Commercial Banks”. The

main objectives of his research were to study and examine the difference of financial

performance and stock prices, to examine the relationship of dividends and stock

price and to explore the signaling effects in stock price.

Williams (2013), In his Journal has defended “The Dividend Model” on the reasoning

that the part of earnings which are not paid out as dividends are reinvested in the

business and which ultimately would produce more dividends through growth. "If

earnings not paid out in dividends are all successfully reinvested at compound interest

for the benefit of the stockholder, as critics imply, then these earnings should provide

dividends later; if not, then they are money lost.

1.6 Methodology

Research Methodology indicates the methods and processes employed in the entire

aspect of the study. In other words, research methodology refers to the various

sequential steps to be adopted by a researcher in studying a problem with certain

objectives. Research methodology is a way for systematically solving the research

problem. Therefore, it is the methods, steps, and guidelines, which are to be followed

in analysis, and it is a way of presenting the collected data with meaningful analysis.

In other words, it is a systematic way to find research problems.

1.6.1 Types of Research

The research design of this study follows the impact of dividend on stock price. In

other words, this research is designed so as to find out the impact on the market price

of common stock of a company when dividend is paid to the shareholders and how

the market price of stock responds when dividend is not paid to the shareholders. In

other words, the study is closely related to the impact of dividend on market price of

common stock and wealth position of shareholders. Therefore, the descriptive as well
 6

as the analytical approach design are adopted here to make the analysis more

effective, financial tools, statistical tools and testing models are also used.

1.6.2 Population and Sample

Out of 28 Commercial banks that are operating their activities in Nepal, researcher

has selected only one commercial banks for this study. Therefore, we are going to

analysis only one commercial banks about their operating activities as a sample.

These Banks are selected due the oldest establishment, market reputation, huge

investment portfolio act.

1.6.3 Types of Data

This study is based on the secondary data. The data relating to the dividend decision,

which are directly obtained from commercial bank. Annual reports, balance sheet,

profit and loss account of commercial banks are main source of data. Beside the data

are also collected from various journals, articles, newspapers and magazines

published by commercial firms. Main sources of secondary data are:

1. Annual report published by commercial bank.

2. Data are collected for the year 2012/13 to 2016/17 as five years data are

analyzed.

3. Nepal Stock Exchange, website (www.nepalstock.com) and perspective firm’s

central office and security exchange board.

1.6.4 Instrument

While processing data in tables and charts both statistical as well as mathematical

tools were applied, while presenting the data, tables and diagrams were followed, with
 7

respect to statistical tools, ratio etc. were used. However, talking about mathematical

tools percentage was followed. By the help of these tools, analysis of data was far

better possible and interpretation was effectively done.

1.6.5 Techniques of Analysis

Various Financial and Statistical tools will be used to analyze the data of this study.

1. Financial Tools

Financial tools are those, which help to study the financial position of the firms. The

financial tools used in this study are as follows.

a) Earnings Per Share(EPS)

The profitability of common stockholder’s investment can be measured in many other

ways. The income of per share is calculated by dividing the earning available to

common shareholders by the total number of common stock outstanding, thus,

Earning Availble to Common Shareholders

The higher earning indicates the better achievements in turns of profitability of the

bank by mobilizing their funds and vice versa. In other words, the Earning per share

indicates the strength and weakness of the bank.

b) Dividend Per Share (DPS)

The whole amount of earning may or may not be distributed to shareholders by a

company. How much per share the dividend is distributed to common shareholder’s
 8

can be known from this ratio. The dividend distributed among the common

shareholders on a per share basis can be determined by this rated

Formula for calculating this ratio is as under

Total Dividend Amount

Generally, the higher DPS creates positive attitude of the shareholders toward the

bank is common stock, which consequently helps to increase the market value of the

shares and it works as the indicator of better performance of the bank management.

c) Dividend Pay Out Ratio (DPR)

The purpose of calculating this ratio is to know the portion of dividend distributed out

of total earning. This ratio shows the relation between the returns belonging to equity

shareholders and the dividend paid to them. It can be calculated as under:

Dividend per share

The higher the dividend payout ratio, the lower will be the proportion of retained

earnings and vice versa.

d) Market Price Per Share (MPS)

Market values of share are one of the variables, which are affected by the dividend per

share and earnings per share of firm. Therefore, the MPS is that value of stock, which

can be obtained by a firm from the market. If the EPS and DPS are high, the MPS will

also be high. In this study, MPS can be obtained from capital market and it is the

closing price of share indicated in the NEPSE Index.

1.7 Limitations
 9

This study will be carried out within certain limitations, which are as follows

 This study is based on especially on secondary data like annual reports of the

banks under review. The study is concerned only at the dividend policy of selected

Nabil bank Limited.

 Data taken for analysis covers only 5 years.

 The study only concentrate on dividend policy, it does not cover several other

aspects of the commercial banks.

 The data of Nabil Bank Limited firms analyze with the use of limited tools and

technique.

1.8 Report Structure

The whole study is divided into three different chapters. They are:

Chapter- I: Introduction

This chapter includes general background of the study, Problems Statement,

Objectives, Rationale, conceptual framework, review of related literature, review of

imperials works, research design, population and sample, source of data, data

collection techniques, data analysis tools and Report Structure.

Chapter- II: Data Representation and Analysis

This chapter deals with the various analysis and interpretations of data and finding of

the study.

Chapter- III: Summary and Conclusion

This chapter includes summary and conclusion of the study.

1. INTRODUCTION......................................................................................................1

1.1 Background..............................................................................................................1

1.2 Problem Statement...................................................................................................1

1.3 Objectives.................................................................................................................2

1.4 Rationale..................................................................................................................2

1.5 Related Literature Review........................................................................................3

1.5.1 Conceptual Review.........................................................................................3

1.5.2 Review of Previous Work...............................................................................4

1.6 Methodology............................................................................................................5

1.6.1 Types of Research...........................................................................................5

1.6.2 Population and Sample....................................................................................6

1.6.3 Types of Data..................................................................................................6

1.6.4 Instrument.......................................................................................................7

1.6.5 Techniques of Analysis...................................................................................7

1.7 Limitations...............................................................................................................9

1.8 Report Structure.......................................................................................................9

REFERENCES