DIVIDEND POLICY OF JOINT VENTURE COMMERCIAL

BANKS IN NEPAL

By

BAL KUMAR THAPA

Global College of Management
T.U Reg. No. 26097-90
Exam Roll No.: 6628/064

A Thesis Submitted to
Office of the Dean
Faculty of Management
TRIBHUVAN UNIVERSITY

In partial fulfillment of the requirement for the degree of Master of Business

Studies (M.B.S)
Kathmandu, Nepal
Janaury, 2011
 RECOMMENDATION

This is to certify that the thesis

Submitted by
Bal Kumar Thapa
Entitled
Dividend Policy of Joint Venture Commercial Banks in Nepal has been
approved by this Department in prescribed format of Faculty of Management.

This thesis is forwarded for examination.

………………………….
( Prof. Dr. Puskar Bajracharya)
Chairman of Research Department

…………………………. …………………………..
Prof. Dr. Madav Raj Koirala Mr. Nar Bahadur Bista
( Thesis Supervisor) ( Principal)

Date : ………………..
 VIVA-VOCE SHEET

We have conducted the viva voce examination of the thesis

Submitted by
Bal Kumar Thapa
Entitled
Dividend Policy of Joint Venture Commercial Banks in Nepal
And found the thesis to be original work of the student and written in according to
the prescribed format. We recommend the thesis to be accepted as partial
fulfillment of the requirement for the Master's Degree in Business Studies
(M.B.S.).

Viva-Voce committee:

Chairman of Research Department: ……………………….

Member ( Thesis Supervisor ): ……………………….

Member ( External Expert ): ……………………….

Date : …………………………
 DECLARATION

I hereby declare that the work reported in this thesis entitled "Dividend Policy of
Joint Venture Commercial Banks in Nepal" submitted to Global College of
Management, Faculty of Management, Tribhuvan University, is my original work
done in the form of partial fulfillment of requirement for Master's Degree of
Business Study (MBS) under the supervision of Pro. Dr. Madhav Raj Koirala,
lecturer of Global College of Management.

Date : …………… ………………………

Bal Kumar Thapa
(Researcher)
Global College of Management
T.U Exam Roll No.: 6628/064
T.U. Registration No.:29097-90
 ACKNOWLEDGEMENT

This research study on "Dividend Policy of Joint Venture Commercial Banks in Nepal" has
prepared as a partial fulfillment of Master's Degree in Business Studies (MBS) program.

I would like to express my sincere thanks and gratitude to my respected teacher, thesis supervisor
Prof. Dr. Madavraj Koirala for his encouragement, proper guidance, direction and valuable
supervision at every stage of my research work.

I also owe thanks to all reputed authors whose books, thesises and articles provide me the
neccessory guidance and valuable materials for enrichment of my research paper in this manner.
I would like to express my genuine appreciation to all the professors, readers and staff members
of Global College of Management, whose suggestions and cooperations made me able to
complete this thesis.

I would like to express my heartfelt thanks to my spouse, my family members and other friends
who have supported me providing constistent help and encouragement.

Finally, I would like to thank all those who helped me directly and indirectly to bring this study
at this stage of completion.

Moreover, it is needless to say that to error is human and I am also no exception, so I apologize
for any errors and mistakes committed in this thesis work.

Bal Kumar Thapa

Lalitpur
Janaury 2011
 LIST OF CONTENTS

Recommendation
Viva-Voce Sheet
Declaration
Acknowledgements
List of Tables
List of Figures
List of Abbreviations

CHAPTER I INTRODUCTION 1-6

1.1 General Background 1
1.2 Statement of the Problem 3
1.3 Objectives of the Study 5
1.4 Significance of the Study 5
1.5 Limitations of the Study 5
1.6 Organisation of the Study 6

CHAPTER II REVIEW OF LITERATURE 7-38

2.1 Conceptual Framework 7
2.1.1 Types of Dividend 11
2.1.2 Types of Dividend Policy 13
2.1.3 Factors Influencing in Dividend Policy 17
2.1.4 Rules Regarding Dividend Practices in Nepal 20
2.2 Review of Major Related Studies 21
2.2.1 Litner's Study 21
2.2.2 Modigliani and Miller's Study 22
2.2.3 Gordan's Study 25
2.2.4 Walter's Study 27
2.2.5 Holder Langreh and Hexter's Study 30
2.2.6 Pandey's Study 32
2.3 Review of Major Studies in Nepalese Prospectives 33
2.4 The Research Gap 38

CHAPTER III RESEARCH METHODOLOGY 39-46

3.1 Research Design 39
3.2 Population and Sample 40
3.3 Source of Data 41
3.4 Methods of Analysis 41
3.5 Data Analysis Tools 41
A. Financial Tools 41
B. Statistical Tools 43
C. Test of Hypothesis 46
3.6 Limitations of Methodology 46

CHAPTER IV PRESENTATION AND ANALYSIS OF DATA 47-75

4.1 Analysis of Financial Indicators 47
4.1.1 Dividend Per Share Analysis 47
4.1.2 Earning Per Share Analysis 48
4.1.3 Relationship between EPS and DPS 50
4.1.4 Retained Earning Analysis 53
4.1.5 Market Value Per Share Analysis 54
4.1.6 Dividend Payout Ratio Analysis 55
4.1.7 Dividend Yield Ratio Analysis 57
4.1.8 Price Earning Ratio Analysis 58
4.1.9 Profitability Ratio Analysis 59
4.1.10 Liquidity Ratio Analysis 61
4.2. Correlation Analysis 62
4.2.1 Correlation between EPS and DPS 62
4.2.2 Correlation between EPS and MVPS 63
4.2.3 Correlation between DPR and MVPS 64
4.2.4 Correlation between MVPS and last year DPS 65
4.3 Regression Analysis 66
4.3.1 Regression of MVPS on EPS 66
4.3.2 Regression of MVPS on last year DPS 67
4.3.3 Regression of DPS on EPS 68
4.4 Test of Hypothesis 69
4.4.1 Test of First Hypothesis 70
4.4.2 Test of Second Hypothesis 71
4.5 Major Findings 72

CHAPTER V SUMMARY, CONCLUSION AND RECOMMENDATION 76

5.1 Summary 76
5.2 Conclusion 77
5.3 Recommendations 78
BIBLIOGRAPHY
APPENDIX
 List of Tables

Table 1. Dividend per Share Analysis(cash) 47

Table 2. Earning per Share Analysis 49
Table 3. Relationship between EPS and DPS of SCBNL 50
Table 4. Relationship between EPS and DPS of HBL 51
Table 5. Relationship between EPS and DPS of EBL 52
Table 6. Retained Earning Analysis 53
Table 7. Market Value Per Share Analysis 54
Table 8. Dividend Payout Ratio Analysis 55
Table 9. Dividend Yield Ratio Analysis 57
Table 10. Price Earning Ratio Analysis 58
Table 11. Profitability Ratio Analysis 60
Table 12 Liquidity Ratio Analysis 61
Table 13. Correlation between EPS and DPS 62
Table 14. Correlation between EPS and MVPS 63
Table 15. Correlation between DPR and MVPS 64
Table 16. Correlation between MVPS and last year DPS 65
Table 17. Simple Regression Equation of MVPS on EPS 66
Table 18. Simple Regression Equation of MVPS on last year DPS 68
Table 19. Simple Regression Equation of DPS on EPS 69
Table 20. Dividend Per Share (total) 70
Table 21. ANOVA Table of First Hypothesis 70
Table 22. Earning per Share 71
Table 23. ANOVA Table of Second Hypothesis 73
 List of Figures

Figure 1. Stable Dividend Policy of Constant Payment 15

Figure 2. Stable Dividend Policy under Target Payment Ratio 16
Figure 3. Retention Rate and Discount Rate 26
Figure 4. Dividend per Share Analysis(cash) 48
Figure 5. Earning per Share Analysis 49
Figure 6. Retained Earning Analysis 53
Figure 7. Market Value Per Share Analysis 54
Figure 8. Dividend Payout Ratio Analysis 56
Figure 9. Dividend Yield Ratio Analysis 57
Figure10. Price Earning Ratio Analysis 59
Figure 11. Profitability Ratio Analysis 60
Figure 12. Liquidity Ratio Analysis 61
 ABBREVIATIONS

ANOVA: Analysis of Variance

C.V. : Covariance
d.f. : degree of freedom
DPR : Dividend Payout Ratio
DPS : Dividend Per Share
DYR : Dividend Yield Ratio
EPS : Earning Per Share
EBL : Everest Bank Limited
Fig :Figure
GON : Government of Nepal
HBL : Himalayan Bank Limited
i.e. : that is
JVBS : Joint Venture Banks
MVPS : Market Value Per Share
NEPSE : Nepal Stock Exchange
NPV : Net Present Value
PE : Probable Error
PE Ratio : Price Earning Ratio
Rs. : Rupees
SCBNL : Standard Chartered Bank Nepal Limited
S.D. : Standard Deviation
SEBON : Security Board of Nepal
& : and
$ : Dollar
 CHAPTER-I

INTRODUCTION

1.1 General Background

A Company is established with the capital which is invested by promoters and general
shareholders. The shareholders are the real owner of company. The shareholders invest their
money in company expecting adequate return. Dividend is the return that the shareholders
receive on their investment. Dividend refers to the portion of net earning which is distributed to
shareholders. In other words, dividend is the part of company's profit distributed to shareholders.
It may be in the form of cash and shares and or a combination of both.

Generally there are two types of shares - common stock and preferred stock. Common stock
popularly known as equity which is generally issued before and after the incorporation of
company. Equity shareholders are the really owner of the company. They have right to elect the
board of directors, apex body of company. Preferred stock is a type of security that has the
features of both fixed income bonds and equity securities. So, it is known as hybrid security.
Preferred stock provides the specific dividend and that is paid before dividends paid to common
stockholders. It takes the preference over common stock in the time of liquidation of company.
Therefore this type of stock is known as preferred stock.

The company earns profit from its activities and the earned profit should be distributed to its
shareholders considering the funds required for its development and diversification. In order to
finance its development and diversification the required fund will be retained and the rest of the
fund can be distributed .The policy of a company on the division of its profits between
distribution to shareholders as dividend and retention for its investment is known as dividend
policy. In this case the company should made decision regarding the payment of dividend as cash
dividend and stock dividend; secondly it has to determine how much it should be. All aspects
and questions related to payment of dividend are contained in a dividend policy. The percentage,
timing and method of payment of dividends are included in dividend and stability of dividend.
There is a reciprocal relationship between retained earnings and cash dividends. It retains more
earnings by the company less will be dividend and vice versa. Dividend decision is the major
decision of financial management. It is in the sense that the firm has to choose between
distributing profits to shareholders and plugging them back into the business. The decision
depends upon the objective of the management for wealth maximization. The firm will use the
net profit for paying dividend to the shareholders if the payment will lead to maximization of the
wealth of the owners. If not it is better to retain them to finance investment programmes. The
relationship between dividend and value of the firm should therefore be the criteria for decision
making.

As a result of the liberalization policy of Government of Nepal, foreign investors and internal
investors were attracted to invest in Nepal in joint venture especially in banking business.
Establishment of commercial banks contributes significantly in the formation and mobilization
internal capital and development efforts. They furnish necessary capital needed for trade and
commerce of mobilization the dispersed saving of the individuals and institutions. The increase
in the opening of the joint venture bank (JVBs) caught a dramatic way after the liberalization and
market oriented economic policy. Though, JVBs are enjoying liberalization, Nepal Rastra Bank
(NRB) has been managing them through its directives and guidelines.

One of the major reason for which public are interested to invest money (as the shares) in banks
or other institutions to get dividend. Normally, business running at profit is capable to pay it. The
amount which is distributed as dividend should be adequate to meet the normal expectation of
shareholders.

There is no uniformity in the dividend distribution practices in Nepal among the different
companies. Recently joint venture banks and some other public limited companies have shown
new trend of paying dividend to shareholders. There is also growing practice of paying bonus
shares among some companies of Nepal. Stock split is another aspect of dividend policy which is
popular in the developed capital market but this aspect is almost neglected in the capital market
of Nepal. An alternative form of dividend is share repurchase. If a firm has excess cash and
insufficient profitable investment opportunities to justify the use of these funds, it is in the
shareholders' interests to distribute the funds. The distributions can be accomplished either by the
repurchase of share or by paying the funds out in increased dividends. It is thus share repurchase
is often viewed as an alternative to paying dividends.

Some companies may pay whole earnings as dividend at the beginning to create good image in
financial sector but later they may change their policy and announce a certain percentage of
dividend payout term. The decision to keep some portion of earnings and to pay some portion of
earnings as dividend is known as dividend policy.

"Although the actual owners of the company are shareholders, they are paid low dividends in
some companies whereas in some companies the dividend is not announced. But recently the
trend of payment of dividend is increasing" (Adhikari, 1999:10).

Dividend policy is one of the major decisions of financial management because it affects the
financial structure, the flow of funds, corporate liquidity and investors' attitudes. After the
successful completion of fiscal year having sufficient profit management decide to declare
dividend to shareholders. The important aspect of dividend policy is to determine the amount of
earning to be distributed to shareholders and the amount to be retained in the firm. It also
determines the forms of dividend.
Having given overall dividend implication among companies and financial institutions, this study
is more specific in assessing the dividend policy and practices of Joint Venture Commercial
Banks of Nepal. In this study, Standard Charterd Bank Nepal, Everest Bank Limited and
Himalayan Bank Limited are taken as sample among the Joint Venture Commercial Banks of
Nepal.

1.2 Statement of the Problem

Dividend, the most inspiring factor for the investment on shares of the corporation, is an
important aspect of financial management. Because the dividend policy determines the division
of earnings between payment to stockholders and reinvestment in the firm to exploit growth
opportunities. It affects the value of firm as well as overall financing decision such as financial
structure, the flow of funds, corporate liquidity and investor's satisfaction.
The dividend decision, however, is still a crucial as well as controversial area of managerial
finance. There is no consensus among the financial scholars on this subject matter and its relation
with stock price. Some financial scholars say that stock prices are least influenced by dividend
per share while some others believe that its relevance to the stock prices is quite significant.

Dividend behavior in Nepalese companies is relatively a recent phenomenon. There are various
empirical studies on the corporate dividends in the capital market other than Nepal. A study
made by H. K. Baker, G. E. Farrelly, and Richard B. Edema in America by surveying the
opinions of financial official officers of 562 New York Exchange firms. This study revealed that
the major determinates of dividend policy in order of their importance are: anticipated level of a
firm's future earnings, pattern of past dividend, availability of cash and concern about
maintaining or decreasing stock price. (Baker, et. al.1985:78-84).

A study on Stock market behaviour in a small capital market in Nepal ( Pradhan, 1993)
attempted to verify the above mentioned results. It mainly indicated that stock paying higher
dividend have higher liquidity, lower leverage, higher earnings, higher turnover and higher
coverage. Another such attempt was made by the study on 'Dividend and Stock Prices" (
Timilsina- 1997) which revealed that the relationship between dividend per share and stock price
is positive and dividend per share affects the share price variedly in different sector. However
pertinent question arises as to what extend these finding are still relevant in the present day
context.

In Nepal, only a small number of companies are paying regular dividend and other companies
are not stable in the payment of dividends. There are still some companies not having the
practice of paying dividends in their historical background. Thus, there is not smooth practice of
dividend payments in Nepal. The expectation of shareholders has yet to be met by paying regular
dividends. It is in the sense that the study devoted to dividend behaviour in Nepal may help to
develop capital market in one way or another.
The Study deals with the following issues:
 1. What are the dividend policies in Nepalese Joint Venture Commercial banks?
2. What is the trend of dividend payout behavior in Nepalese Joint Venture
Commercial banks?
3. What relationship does exist between dividend per share and other financial
indicators such as earnings per share, retained earning per share and market price per
share, dividend payout ratio, and dividend yield and liquidity ratio?
4. What are the factors that affect the dividend policies of Nepalese Joint Venture
Commercial Banks?

1.3 Objectives of Study

The basic objective of the study is to analyze the dividend behaviour of Nepalese joint venture
commercial banks. The specific objectives of the study have been the following:
1. To examine dividend policy and practices in Nepalese Joint Venture Commercial
banks.
2. To examine the relationship between earnings, dividends, retained earnings and
market price of stocks, dividend payout ratio, dividend yield and liquidity ratio.
3. To analyze the effect of dividend in share price.

1.4 Significance of Study

The finding of this research will be of worth to the shareholders to see the dividend policy of the
three joint venture commercial banks in comparison. So, this may be helpful for them in
identifying the productivity of their investment and justify the rational of their investment
decision. Then it will also benefitted by the management to point out the loopholes and suggest
the remedies about the appropriate dividend policy.

Similarly, this research will also be beneficial to the policy makers from the comparative study
of dividend policy. They can get important findings which are useful in policy making about
dividend policy formulation.
Finally, the dividend policies of the joint venture banks are of great interest to the several
outsiders. They are customers, financial agencies, stock brokers, interested person and scholars.
It is believed that except those, other banks will be benefited with this study.

1.5 Limitations of the Study

A research is a vast study investigating the subject matter for solving perceived research
problems. Each and every study has its own limitations. No study can be free from constraints,
such as economic resources, time etc. And this study too is not an exception. Therefore, the
following are the main limitations of the study.
1. The study is mainly based on the secondary data.
2. The methodology used in the study may not help draw premise conclusion of study.
3. The study covers only three joint venture commercial bank of Nepal

In addition, there are couples of limitations, which weaken the generalization e.g. time
constraint, reliability of statistical tools. Thus, while using the findings of the study one should
be careful and use the same judiciously be considering the various limitations.

1.6 Organization of the Study

The study has been organized into five chapters; each chapter deals some important factors of
dividend behaviour. The titles of each of these chapters are listed below:
Chapter 1 Introduction
Chapter 2 Review of Literature
Chapter 3 Research Methodology
Chapter 4 Presentation and Analysis of Data
Chapter 5 Summary, Conclusion and Recommendation
Chapter 1. This is the introduction chapter of the study. This chapter includes general
background, statement of problems, objectives of study, importance of the study and limitations
of the study and organization of the study.

Chapter 2. This chapter is the review of literature deals with conceptual framework of the
dividend policy. In this part research history of dividend policy will present in brief. Review of
major studies will be also presented.
Chapter 3. This chapter contains the research methodology. This chapter deals with research
design, sources of data, data collection techniques data processing and data analysis tools.

Chapter 4. This chapter deals with the presentation and analysis and major findings of the study
on dividend.

Chapter 5. This chapter includes summary, conclusion and recommendations.

 CHAPTER-II

REVIEW OF LITERATURE

Dividend policy has great importance in financial management because it affects the financial
structure, the flow of fund, corporate liquidity requirement and investors attitude. Thus it is one
of crucial decision and firm attempts to maximize the value of firm's common stocks by means
of dividend decision. Due to its increasing importance, many thoughts, provoking ideas in this
area are upcoming which needs to review. This chapter highlights upon the literature that are
concerned to this subject. Similarly, what others have said, done or written etc. About the
dividend policy are reviewed, which provides useful input in this study. The review of literature
is divided into two parts one is conceptual framework and other one is review of different
studies.

2.1 Conceptual Framework

Every investor invests their money to buy shares of firm with the hope of sharing profit earned
by firm since they want to receive maximum returns on their investment. It depends upon
management policy that how much total profit to distribute as dividend and how much to retain
in the business. But this is fact that all the profit made by firms actually belong to stockholders.
Whether profit are distributed in the firm of dividend or reinvested in the business, benefits go to
shareholders directly or indirectly.

"Dividend decision can’t be taken in isolation as well as in vacant, rather various factor like
investment opportunities, financing decisions, shareholders expectation, legal provisions is to be
taken into consideration so that it maximize the value of the firm or shareholders’ wealth. There
are two sources of financing in an existing firm." (Gitman 1976: 89)
a. Internal source (i.e. retained earnings),
b. External source of financing (i.e. external share, debenture)

But the retention of net profit widely effected by the dividend policy. If the firms adopt sound
dividend policy, then less funds will be available. On the contrary, if the firms adopt tight
dividend policy then excess fund will be available for financing. So, external sources of
financing and internal sources of financing affect the company’s capital structure. Therefore
controversial question arise of taking dividend decision for the financial manager.

In the course of retaining the portion of earning, how much of earnings to be retained to exploit
growth opportunities of firm and how much earnings to be paid to the shareholders for their
contribution in capital structure, to be decided. This is the difficult question in dividend policy.

Dividend policy determines the division of earnings between payments to stockholders and
reinvestment in the firm. Retained earnings are one of the most significant sources of funds for
financing corporate growth, but dividends constitute the cash flows that accrue to stockholders.
(Pandey; 1989: 67)

Many variables influence dividends, however for example, a firms cash flows and investment
needs may be two volatile for it to set a very high regular dividend. Yet, it may desire a high
dividend payout to distribute funds not necessary for reinvestment. In such a case, the directors
can set a relatively low regular dividend – low enough that it can be maintained even in low
profit years or in years when a considerable amount of reinvestment is needed-and supplement it
with an extra dividend in years when excess funds are available. (Weston and Brigham; 1964: 172)

In corporate finance, dividends represent a distribution of the book surplus, accompanied by a

distribution of assets, or by a change in the form of equities, or an increase in the liabilities of the
corporation. The corporate form of business organization entails separation between ownership
and control of a company. The shareholders entrust their money to corporate Managers in
expectation of a return on their capital. Dividend policies are determined by the board of
directors. But they have to take into consideration of a number of factors in determining their
dividend policies and variations there in. (Gilbert and Edwin 1967: 230)
The Board of Directors are also subject to a series of legal restrictions which are intended to
maintain the capital of the corporation and to safe corporation. There are some legal
considerations to distribute dividend to shareholders. The Board of Directors of company has to
take the decision about dividend on the considerations various facts except concerned legal
provisions. Except legal considerations, the various principles underlying the policies of
dividend distribution are as follows.

a. Type of Industry
The nature of the business conducted by a company has an influence upon its dividend policy.
Industries that are characterized by stability of earnings may formulate a more consistent policy
as to dividends than those having an uneven flew of income Usually, enterprises dealing in
necessities suffer less from oscillating earnings than those dealing in luxuries or fancy goods. For
instance, public utilities are in much better position to adopt a relatively fixed dividend rate than
the industrial concerns. (Mathur 1999: 74)

b. Age of a Corporation
Closely related to the type of industry, the age of a company goes far to determine the dividend
policy. Newly established enterprises require much of their earnings for plant improvement and
expansion, while companies which have attained a longer earning experience can formulate a
clear-cut dividend programmed and may even by liberal in the distribution of earnings. (Mathur
1999: 73)

c. Extent of Share Distribution

A closely held company is likely to get the acquiescence of the shareholders for the suspension
of dividend or for following a conservative dividend policy. But a company with a large number
of shareholders and also with shareholders widely distributed would face a great difficulty in
securing such asset. Reduction in dividends can be effected but not ordinarily with the hearty Co-
operation of the shareholders. (Mathur 1999: 74)

d. Need for Additional Capital

The company retains a part of their earnings for strengthening their financial position. The extent
to which the profits are ploughed back into the business has got a conditioning influence on the
dividend policy. The income may be conserved for meeting the increased requirement of
working capital or for future expansion. Small companies possessing no other alternatives to
raise finance for their growth have to depend upon this source. (Hestings 1996:27)
e. Business Vicissitudes
With the cyclic variation in the business, the earnings, demand for capital investment and money
market conditions also vary from stage to stage. The dividend policy is adjusted in accordance
with the business oscillations. During the boom, prudent corporate management creates good
reserves for facing the crisis which follows the inflationary period. Higher rates of dividend are
used as a tool for marketing the securities in an otherwise depressed market. The dull years
become easier to be weathered and financial solvency to be maintained more successfully if the
adequate reserves have been built up through conservation of earnings. (Hestings 1996:29)

f. Change in Government Policies

With the variation in the fiscal, industrial, labour, control and other government policies the
earning capacity of the different enterprises is affected favorably or adversely. The dividend
policy has to be modified accordingly. Sometimes government limits the rate of dividend
declared by concerns in a particular industry or in all the spheres of business activity. In a
capitalistic society such a step taken by Government leads to wasteful expenditure by the
business unit besides discouragement of capital formation. (Rao 1992:43)

g. Taxation Policy
High taxation is said to be the cause of lowering the earnings of the corporations and,
consequently, their rates of dividend. Some recent studies have shown that the rates of dividend
may not be affected by high rates of taxes because the incidence may be shifted to consumers.
This is claimed to be the case in respect of some Indian companies where the indices of taxes and
the rates of dividend move in similar directions to show that the dividend distribution was not
adversely affected by the alleged high rates of taxes.

Corporate taxes affect dividends, both directly and indirectly – directly, in as much as they
reduce the residual profits after tax available for shareholders, and indirectly, as the distribution
of dividends beyond a certain limit is itself subject to tax. For instance dividend beyond 10
percent of the paid-up capital are subject to 7.5 percent by way of dividend tax. (Rao 1992:43)
After examining the various factors which determine the dividend policy of the companies, we
may study the importance of stability in the rate of dividend. The regularity of dividend payment
and the stability of its rate are the two main objectives made at by the corporate management.
They are accepted as desirable for the corporation’s credit standing and for the welfare of
shareholders. High earnings may be used to pay extra dividends but such dividend distributions
should be designated as “extra” and care should be taken to avoid the impression that the regular
dividend is being increased. A stable dividend policy should not be taken to mean an inflexible
or rigid policy. On the other hand, it entails the payment of a fair rate of return, taking into
account the normal growth of the business and the gradual impact of external events. A stable
dividend records makes future financing easier. It not only enhances the credit standing of the
company but also stabilizes market value of the securities outstanding. The confidence of
shareholders in the corporate management is also strengthened.

2.1.1 Types of Dividend

The firm uses different types of dividend to the shareholders to implement their objectives and
policies. Before distribute the dividend, they first ensure that what is the current situation of the
firm? What is the growth rate of the firm? How much dividend will need to meet the expectation
of the shareholders? “The type of dividend that corporation follow is partly a matter of attitude of
directors and partly a matter of a various circumstances and financial constraints that bound
corporate plans and policies (Shrestha,1980:670) Some of the major types of dividends are as
follows.

a. Cash Dividend
The portion of earnings paid in cash to the investors in the proportion of their share is called cash
dividend. Most of the firms pay dividend in cash. The cash account and reserve account of
company will be reduced when cash dividend is paid.“Both the total assets and net worth of the
company are reduced when the cash dividend is distributed. The market price of the share drops
in most cases by the amount of the cash dividend distributed (Hesting, 1996:370)
The company has to maintain required level of cash for distribution of cash dividend, otherwise
it may be difficult and fund must be borrowed for this purpose. When the company follows
stable dividend policy, they use to prepare cash budget to indicate necessary funds which would
be needed to meet regular dividend payment of company. When unstable dividend policy is
followed, it is difficult to manage cash.

In the context of Nepal, Cash dividend is the most popular form of dividend so it is very popular
in commercial banks and other firms. However it depends upon the earning of firm, management
decision, Government policy, Nepal Rastra Bank policy and other various internal and external
factors.

b. Stock Dividends
If additional shares are issued to existing shareholders instead of cash dividend, it is known as
stock dividend. Stock dividend is only the paying stock equaling to the dividend that is to be
received by shareholders. In stock dividend, additional shares are issued to existing shareholders
instead of cash dividend. A stock dividend represents a distribution of shares in lieu of cash
dividend.

A stock dividend is paid in additional shares of stock instead of in cash and simply involves a
book-keeping transfer from retained earning to the capital stock account. (Weaston & Copland
1986:680)

Firm pays stock dividend instead of cash dividend. It represents nothing more that a bookkeeping
shift within the share holders’ equity account on the firm’s balance sheet, a shareholder’s
proportional ownership in the firm remains unchanged. It is simply the payment of additional
shares of common stock to shareholders. Stock dividend increases the number of shares as a
result; EPS, DPS and market price of share of company decrease. Accounting authorities make a
distinction between small-percentage stock dividends and large-percentage stock dividends.
i. Small-Percentage Stock Dividends
If a stock dividend represents an increase of less then 10 percent of the previously
outstanding common stock, it is referred to as a small-percentage stock dividend.
Accounting for this type of stock dividend entails transferring on amount from retained
earnings to common stock and additional paid-in capital.
ii. Large-Percentage Stock Dividends
Large-percentage stock dividends (typically 20 percent or higher of previously outstanding
common stock) Must be accounted for differently while small-percentage stock dividends
are not expected to have much effect on the market value per share of stock, large-
percentage stock dividends are expected to materially reduce the market price per share of
stock. In the case of large percentage stock dividends, therefore, conservatism argues for
reclassifying an amount limited to the par value of additional shares rather than an amount
related to the pre-stock dividend market value of the stock.

The effects of stock dividend are as follows.

i. Firm’s assets or liabilities are same, it doesn’t change
ii. It doesn’t affect the shareholders proportional ownership.
iii. Theoretically it is valueless to shareholders.

c. Bond Dividend
It is a kind of dividend in which stockholders receive bond. It is distributed only that condition
when the company declares dividend in the form of its own bond. Bond dividend helps to
postpone the payment of cash. These are given when the firms are unable to take the burden of
interest of loans. (Van Horne; 1971: 273)

d. Property Dividend
Property dividend is a kind of dividend which is given in the form of property instead of cash.
This method is rarely used in practical. Company is own products and securities of subsidiaries
are the examples that have been paid as property dividend. (Van Horne; 1971: 273)

e. Interim Dividend
Generally dividends are declared in the end of the financial year. This is called regular dividend.
But when management declares dividend before the end of financial years, it is called interim
dividend. (Van Horne; 1971: 274)
f. Script Dividend
Script dividend is a form of promissory note promising to pay the holder at a specified later date.
The scrip may be interest bearing or not. Issuing of this note indicates that the company has
shortage of cash to distribute as a dividend. This type of dividend is very unpopular to use. (Van
Horne; 1971: 275)

2.1.2. Types of Dividend Policy:

The dividend paid out of profit by company, is guided by dividend policy that is followed by
company. Generally, dividend policy can be categories as conservative, liberal, moderate and
progressive dividend policy. Whatever dividend policy followed by the corporate firm, it is the
concept that resolves the apparent conflict by finding optional dividend payout that balance the
need of shareholders for their current incomes and expected future growth of the firm so as to
maximize the value of firm. The optional dividend policy is the dividend policy that sticks a
balance between current and future growth and maximizes the firm's stock price.

2.1.2.1 Residual Theory of Dividend

This theory assumes that external sources of finance are not available or even if it is available,
the same cannot be used due to its excessive cost. Accordingly, how much dividend a company
should distribute will be depended on how much investment opportunities it has available at
present. If there are positive NPV projects available then instead paying dividends to
shareholders, the same can be used in financing the positive projects. In the case, shareholders
wealth is maximized by reducing dividend or not paying dividend at all. Shareholders will be
compensated for this reduction on nil dividends now by a gain in the form of higher dividend in
the future.

Dividends are thus residual payment in the sense that this is paid provide sufficient earnings are
retained in the company to finance new investments. Thus residual theory treats dividends as a
passive decision which is completely depended on how much amount or whether company
employs earnings is in financing profitable projects. Thus the divided will vary from year to
year. But such fluctuations in dividend have no effect on shareholders as they are compensated
of present loss, if any, of dividend by future capital gain.

2.1. 2.2 Dividend Stability

The major aspect of the dividend policy of a firm is the stability of dividends. Stability of
dividend payments is an attractive feature to many investors. The investors favor a stable
dividend as much as they do the payment of dividends (D/P ratio). By stability we mean
maintaining the position of the firm’s dividend payments in relation to a trend line.

Preferably one that is upward sloping. All other things being the same, a share of stock may
command a higher price of it pays at a fixed percentage of earnings. The term dividend stability
refers to the consistency or lack of variability in the stream of dividends (Van horne, 1971:507-
519). In more precise terms it means that a certain minimum amount of dividend is paid out
regularly. The stability of dividends can be any of the following three forms.

i. Constant Dividend Per Share

According to this form of stable dividend policy, a company follows a policy of paying a certain
fixed amount per share as dividend. For instance, on a share of face value of Rs. 10, a firm may
pay a fixed amount of, say, Rs. 2.50 as dividend. This amount would be paid year after year,
irrespective of the level of earrings. In other words, fluctuations in earnings would not affect the
dividend payment. In fact, when a company follows such a dividend policy, it will pay dividends
to the shareholders even when it suffers losses. It should be clearing noted that a stable dividend
policy in terms of a fixed amount of dividend per share does not mean that the amount of
dividend is fixed for all times to come. The dividends per share are increased over the years
when the earnings of the firm increase and it is expected that the new level of earnings can be
maintained.

The relationship between the earnings per share (EPS) and dividends per share (DPS) with a
constant dividend policy per share is shown in Figure1.
 Figure 1
Stable Dividend Policy of Constant Rupee Dividends.

EPS

DPS

EPS & DPS (Rs)

Time (years)

It can, thus, be seen that while the earning, may fluctuate from year to year, the dividend per
share is constant. To be able to pursue such a policy, a firm whose earnings are not stable would
hare to make provisions in years when earnings are higher for payment of dividends in lean
years.

ii. Constant Payout Ratio

Another form of stable dividend policy is constant/target payout ratio. The term payout ratio
refers, as already mentioned, to the ratio of dividend to earnings or the percentage share of
earnings used to pay dividend. A stable dividend payout ratio implies that the percentage of
earnings paid out each year is fixed. Accordingly, dividends would fluctuate proportionately with
earnings and are likely to be highly volatile in the wake of wide fluctuations in the earnings of
the company. As a result, when the earnings of a firm decline substantially or there is a loss in a
given period, the dividends, according to the target payout ratios, would be low or nil. To
illustrate, if a firm has a policy of 50% target payout ratios, its dividends will range between Rs.
5 and zero per share on the assumption that the earnings per share are Rs. 10 per share and zero
(or loss) per share respectively. The relationship between the earnings per share (EPS) and
dividend per share (DPS) under the policy of constant payout ratio is shown in Figure 2.

Figure 2
Stable Dividend Policy Under Target Payout Ratio.

EPS

EPS and DPS DPS

Time (years)

iii. Low Regular Plus Extra

Under this policy, both dividend policy (constant dividend per share and constant dividend
payout ratio) are included. Under this policy, a firm usually pays a constant dividend to the
shareholders and when profits of the firm swell, additional or extra dividend is paid over and
above the regular dividend. In normal condition the firm cuts the extra dividend and pays normal
dividend per share. Generally this type of policy is mostly followed by those companies whose
stockholders prefer at least a certain account of regular dividends.
2.1.3. Factors Influencing Dividend Policy
Dividend decision is the critical decision for the management. Various factors should be
considered while taking dividend decision. Following factors influenced in dividend policy
decision directly or indirectly.

a. Legal Rules
The legal rules are important in establishing the legal boundaries with in which a firm’s finalized
dividend policy can operate. These rules have to do with capital impairment, insolvency and
undue retention of earnings.

i. Capital Impairment Rule

Some states define capital as the total par value of the common stock. If a firm’s shareholders’
equity consists of $4 million in common stock (at par), $3 million in additional paid-in capital
and $ 2 million in Retained earnings, total capital would be $ 4 million. This company could not
pay a cash dividend to telling more than $ 5 million without impairing capital (i.e., reducing
shareholders equity below $ 4 million).

Other states define capital to include not only the total par value of the common stock but also
the additional paid in capital. Under such state statutes, dividends can be paid only to the extent
of retained earnings. Notice, we did not say that dividends can be paid “Out of retained
earnings.” A Company pays dividends “Out of cash,” while incurring a corresponding reduction
in the retained earnings account.

ii. Insolvency Rule

Some states prohibit the payment of cash dividends if the company is insolvent. Insolvency is
defined either in a legal sense, as total liabilities of a company exceeding its assets “at a fair
valuation” or, in an “equitable” (technical) sense, as the firm’s inability to pay its creditors as
obligations come due. As the firm’s ability to pay its obligations is dependent on its liquidity
rather than on its capital, the equitable (technical) insolvency restriction gives creditors a good
deal of protection. When cash is limited, a company is restricted from favoring shareholders to
the determent of creditors.

iii. Undue Retention of Earnings Rule

The internal Revenue code prohibits the undue retention of earnings. Although undue retention is
vaguely defined, it is usually though to mean retention significantly in excess of the present and
future investment needs of the company. The purpose of the law is to present companies from
retained earnings for the sake of avoiding taxes.

b. Liquidity Position of company

Profits held as retained earnings are generally invested in assets required for the conduct of the
business, retained/earnings from preceding years are already invested in plant and equipment,
inventories, and other assets; they are not held as cash. Thus, even if a firm has a record of
earnings, it may not be able to pay cash dividends because of its liquidity position. Indeed, a
growing firm, even a very profitable one, typically has a pressing need for funds, in such a
situation the firm may elect not to pay cash dividends.

c. Need to Repay Debt

When a firm has issued debt to finance expansion or to substitute for other forms of financing, it
is faced with two alternatives. It can refund the debt at maturity by replacing it with another form
of security, or it can make provisions for paying off the debt. If the decision is to retire the debt,
this will generally require the retention of earnings.

d. Restrictions in Debt Contracts

Debt contracts, particularly when long-term debt is involved, frequently restrict a firm’s ability
to pay cash dividends such restrictions, which are designed to protect the position of the lender,
usually state that (1) future dividends can be paid only out of earnings generated after the signing
of the loan agreement (that is, they cannot be paid out of past retained earnings) and (2) that
dividends cannot be paid when net working capital (current assets minus current liabilities) is
below a specified amount. Similarly, preferred stock agreements generally state that no cash
dividends can be paid on the common stock until all accrued preferred dividends have been paid.
e. Stability of Earnings
A firm that has relatively stable earnings is often able to predict approximately what its future
earnings will be such a firm is therefore more likely to pay out a higher percentage of its earnings
than is a firm fluctuating earnings. The unstable firm is not certain that in subsequent years the
hoped-for earnings will be realized, so it is likely to retain a high proportion of current earnings.
A lower dividend will be easier to maintain if earnings fall off in the future.

f. Profit Rate
The expected rate of return on assets determines the relative attractiveness of paying out earnings
in the form of dividends to stockholders (who will use then elsewhere) or using them in the
present enterprise.

g. Rate of Asset Expansion

The more rapidly a firm is growing, the greater its needs for financing asset expansion. The
greater the future need for funds, the more likely the firm is to retain earnings rather than pay
then out. If a firm seeks to raise finds externally, natural sources are the present share holders,
who already know the company. But if earnings are paid out as dividends and are subjected to
high personal income tax rates, only a portion of them will be available for investment.

h. Access to the Capital Markets

A large, well established firm with a record of profitability and stability of earnings has easy
access to capital markets and other forms of external financing. A small, new, or venturesome
firm, however, is riskier for potential investors. Its ability to raise equity or debt funds from
capital markets is restricted, and it must return more earnings to finance its operations. A well
established firm is thus likely to have a higher dividend payout rate than is a new or small firm.

i. Control
Another important variable is the effect of alternative sources of financing on the control
situation of the firm. As a matter of policy, some corporations expand only to the extent of their
internal earnings. This policy is defended on the ground that raising funds by selling additional
common stock dilutes the control of the dormant group in that company. At the same time,
selling debt increases the risks of fluctuating earnings to the present owners of the company.
Reliance on internal financing in order to maintain control reduces the dividend payout.

j. Inflation
“In an indirect way inflation can act as a constraint on playing dividends. Out accounting system
is based on historical costs. Depreciation is charged on the basis of original cost at which assets
were acquired as a result, when prices rise, funds saved on account of depreciation would not be
Adequate to replace assets or to maintain the capital intact and preserve the earning power of the
fine earning would be retained" (Pandey, 1991:770).

2.1.4. Rules Regarding Dividend Practices in Nepal

In Nepal company act always has some legal provisions for dividend payment. Nepal Company
Act 2063 has some provisions about payment of dividend of company. Those provisions are
mentioned as below:

Section 2 (Q) sates that bonus share (stock dividend) mean share issued in the form of additional
shares to share holders by capitalizing the surplus from the reserve find or the profit of the
company. The term also indicates an increase in the paid up values of the shares after
capitalizing surplus or reserve funds.

Section 61 has prohibited company form purchasing, its own share. This section states that no
company shall purchase its own shares or supply loans against the security of its own shares.

Section 179 is about bonus share bonus. Under subsection (1) of this section, this may be done
only according to a special resolution passed by the general Meeting.

Subsection (2) of same section states that the company must inform the office of company
registrar before issuing bonus shares.
Section 182 is about dividends and sub section of this section as follows:-
Sub section (1) states that except in the following circumstances, dividends shall be distributed
among the shareholders within 45 days from the date of decision to distribute them.
− In case of any law forbids the distribution of dividends.
− In case of the right to dividend is disputed.
− In case of dividend cannot be distributed within the time limit mentioned above owing,
the circumstances beyond any one’s control and without any fault on the part of the
company.

Sub section (3) in case dividends are not distributed with the time limit, mentioned in sub section
(1) this will be done by adding interest at the prescribed rate sub section (3) states only the
person whose have stands registered in the register of existing shareholders at the time of
declaring the dividend shall be entitled to it.
Sub section (4) states that dividend will be paid to the registered shareholders in the book of the
company at the time of decision of the dividend or right holders as per the law.
Subsection (5) states that dividend can be paid to shareholders after deducting depreciation,
payments/ provisions as per the law and all the loss of previous years. Dividend can be
distributed without reserves or provisions as per existing law.

2.2 Review of Major Related Studies

2.2.1 Linter's Study (1956)
Linter (1956) made an important study on corporate dividend policy in the American context. He
made fifteen readily observably factors and characteristics that appeared reflect or Might be
expected to have on important beaming on dividend payments and policy (Linter, 1956:97-113).
Then, he reviewed the available information on over 600 listed, will established companies and
selected 28 for dividend investigation.

The Objectives of the Study were;

• To identify occasions when a change in dividends might well have been under active
consideration even though no change was made.
 • To determine the factors which existed must actively into dividend decision. Different
views were collected with regard to occasion companies responsible official including
presidents, financial vice presidents, treasurers, controllers and directors.

He concluded that a Major portion of dividend of a firm could be expressed in following

equations.
Div*t = P EPSt ……………… (i)
And DIVt – DIVt–1 = a + b (DIV1 – DIVt–1)+eq
Where
Div* =Firm’s desired pay: lent
P EPSt = Earnings
p= targeted payout ratio
a= constant relating to dividend growth
b = Adjustment factor and new desired level of dividends were b < 1.

The Major findings of this study were;

• Firm’s generally think in terms of proportion of earnings to be payout.
• Investment opportunities, liquidity position, funds flow are not considered for
modifying the pattern of dividend.
• Firms generally have target payout ratio in view which determining change in
dividends per share.

2.2.2 Modigliani and Miller’s Study (1961)

The must comprehensive argument in support of the irrelevance of dividends is provided by the
MM hypothesis. MM maintain that dividend policy has no effect on the share prices of the firm
and is the investment policy through which the firm can increase its earnings and there by the
value of the firm. Given the investment decision of the firm, the dividend decision splitting the
earnings into packages of retentions and dividends-is a matter of detail and does not matter.
"Under conditions of perfect capital Markets, rational investors, absence of the discrimination
between dividend income and capital appreciation, given the firm’s investment policy, its
dividend policy may have no influence on the market price of the shares" (Modigliani & Miller,
1961:411-433).

The MM hypothesis of irrelevance of dividends is based on the following critical assumptions.

a. Perfect capital Markets in which all investors are ration Information is available to all
free of cost, there are no transaction costs; securities are infinitely divisible; no
investors is large enough to influence the market price of securities; there are no
flotation costs.
b. There are no taxes; alternatively there are no differences in tax rates applicable to
capital gains and dividends.
c. A firm has given investment policy which does not change. The operational
implication of this assumption is that financing of new investments out of retained
earnings will not change the business risk compression of the firm and, therefore, no
change in the required rate of return.
d. There is perfect certainty by every investor as to future investments and profits of the
firm. In other words, investors are able to forecast future prices and dividends with
certainty.)But this assumption is dropped by MM later. Modigliani and miller
provide the proof in support of their argument in the following manner.

Step 1
The Market price of a share in the beginning of the period is equal to the present value of
dividends paid at the end of the period plus the market price of the share at the end of the period.
Symbolically,
1
P0 = (1 + k ) (D1 + P1)
e

Where,
P0 = The prevailing market price of a share
Ke = The cost of equity capital.
D1 = The dividend to be received at the end of period one
P1 = The market price of a share at the end of period one.
Step 2
Assuming no external financing, the total capitalized value of the firm would be simply the
number of shares (n) times the price of each share (P0).
Thus we take,
1
nP0 = (1 + k ) (nD1 + nP1)
e

Where,
n = No. of equity share at zero period

Step 3
If the firm’s internal sources of financer its investment opportunities fall short of the funds
required, and A, is the number of new shares issued at the end of year 1 at price of P, then.

Symbolically,
1
nP0 = (1 + k ) [nD1 + (n + ∆n)P1 – ∆nP1]
e

Where,
n = The number of shares outstanding at the beginning of the period.
∆n = The change in the number of shares outstanding during the period.

Equation of step 3 implies that the total value of the firm is the capitalized value of the dividends
to be received during the period plus the value of the number of shares outstanding at the end of
the period, considering any newly issued shares, less the value of the newly issued shares. Thus,
in effect, equation of step 3 is equivalent of equation of step

Step 4
If the firm where to finance all investment proposals, the total amount of new shares issued
would be given by the following equation.
∆nP1 = I – (E – nD1)
Or, ∆nP1 = I – E + nD1
Where,
 ∆nP1 = The amount obtained from the sale of new shares to finance capital
budget.
I = The total amount requirement of capital budget.
E = Earnings of the firm during the period.
nD1 = Total dividends paid.
(En–D1) = Retained earnings.

Step 5
If we substitute equation of step 4 in to equation of step 3, we derive equation of step 5.
nD1 +(n+∆n) p1 – 1 + E– nD1
nP0 = (1+ ke)
There is a positive nD1 and negative nD1.
Therefore, nD1 cancels. We then have,
(n+∆n) p1 – 1 + E
nP0 = (1+ ke)

Step 6
Since dividends are not found in above equation. So Modigliani and miller conclude that
dividends do not count and that dividend policy had no effect on the share price.

In this way, according to Modigliani and Miller study, It seems that under conditions of perfect
capital markets, rational investors, absence of tax discrimination between dividend income and
capital appreciation, given the firms investment policy, its dividend policy may have no
influence on the market price of the shares.

2.2.3 Gordon’s Study (1962).

Another theory which contends that dividends are relevant is the Gordon Model (Gordon,
1959:99-105) This Model, which opinions that dividend policy of a firm affects its value, is
based on the following assumptions.
i. The firm is an all equity firm. No external financing is used and investment programs
are financed exclusively by retained earnings.
 ii. Internal rate of return( r ) and appropriate discount rate ( ke) are constant.
iii. The firm and its stream of earning have perpetual life.
iv. The retention ratio (b), once decided upon, is constant.
Thus, the growth rate, (g=br) is also constant.
The discount rate is greater than growth rate i.e. ke > br.

It can be seen from the assumptions of Gordon’s Model that they are similar to those of
Walter’s Model. As a result, Gordon’s Model, like Walter’s, contends that divided policy
of the firm is relevant and that investors put a positive premium on current
incomes/dividends. But Gordon goes one step further and argues that dividend policy
affects the value of shares even in a situation in which the return on investment of a firm is
equal to the required/capitalization rate, while Walter's approach is of the view that the
investors are indifferent between dividends and retention. Crux of Gordon’s arguments is a
two-fold assumption.
a. Investors are risk-averse, and
b. They put a premium on a certain return and discount/penalize uncertain
returns.

The investors are rational. Accordingly, they want to avoid risk. The term risk refers to the
possibility of not getting a return on investment. The payment of current dividends removes any
chance of risk. If, however, the firm retains the earrings (i.e current dividends are with held), the
investors can expect to get a dividend in future. The future dividend is uncertain, both with the
respect to the amount as well as timing. The rational investors can reasonably be expected to
prefer current dividends, i.e. they would place less importance on it as compared to current
dividend. The retained earnings are evaluated by the investors as a risky promise. In case the
earnings are retained, therefore, the market price of the shares would be adversely affected.
Basing Model on this argument, Gordon argues that the future is uncertain and the more distant
the future, the more uncertain it B likely to be Fig.3.
 Fig.3. Retention Rate and Discount Rate.

Discount Rate

Retention Rate
If, therefore, current dividends are with held to retain profits, whether the investor would at all
receive them later is uncertain. Investors would naturally like to avoid uncertainty. In fact, they
would be inclined to pay a higher price for shares on which current dividends are paid.
Conversely, they would discount the value of shares of a firm which postpones dividends. The
discount rate would vary, as shown in above figure, with the refection rate or the level of
retained earnings. The term retention ratio means the percentage of earnings retained. It is the
inverse of D/P ratio. The omission of dividends, or payment of low dividends, would lower the
value of the shares. According to Gordon, the Market value of a share is equal to the present
value of future streams of dividends.)
A simplified version of Gordon’s Model can be symbolically expressed as,
E(1–b)
P = ke–br

Where,
P = price of shares
E= Earnings per share
b= Retention ratio or percentage of earnings retained
1-b= D/P ratio, i.e. percentage of earnings distributed as dividends.
Ke = Capitalization rate/cost of capital.
br = g = Growth rate in r, i.e. rate of return on investment of an all equity firm.
Gordon contends that the dividend decision has a bearing on the market price of the share in
situations where r>ke, the market price of the share is favorably affected with more retentions.
The reverse holds true when r < ke, i.e, more retentions lead to decline in market price.
Retentions do not affect the market price of the share when r=ke.
According to this Model following facts are revealed.

a. Growth Firm (r >ke)

Share price tends to decline in correspondence with increase in payout ratio or decrease in
retention ratio i.e. high dividends corresponding to earning leads to decrease in share price.
Therefore, dividends and stock prices are negatively correlated in growth firm.
Negatively correlate in growth firm.

b. Normal Firm (r = ke)

Share value remains constant regardless of changes in divided policies which mean
dividends and stock prices are free from each other.

c. Declining Firm (r < ke)

Share price tends to rise in correspondence with rise in dividend payout ratio. It means dividend
and stock prices are positively correlated with each other in declining firm.

2.2.4 Walter's Study (1966)

Walter's study supports the doctrine that dividends are relevant. The investment policy of a firm
cannot be separated from its dividend policy and both are, according to Walter, interlinked. The
choice of an appropriate dividend policy affects the value of an enterprise (Walter, 1963:280-
291)

The key argument in support of the relevance proposition of Walter’s model is the relationship
between the return on a firm’s investment or its internal rate of return (r) and its cost of capital or
the requited rate of return (k).
The firm would have an optimum dividend policy which will be determined by the relationship
of r and k. In other words, if the return on investments exceeds the cost of capital, the firm
should retain the earnings, where as it should distribute the earnings to the shareholders in case
the required rate of return exceeds the expected return on the firm’s investments.
Walter’s model are based on following critical assumptions:-
i. All financing is done through retained earnings external sources of funds like debt or
new equity capital are not uses.
ii. With additional investments undertaken, the firm’s business risk does not change. It
implies that r and k are constant.
iii. There is no change in the key variables, namely, begin earnings per share, E, and
dividends per share, D. The values of D and E may be changed in the model to
determine results, but, any given value of E and D are assumed to remain constant in
determining a given value.
iv. The firm has perpetual (or very long) life considering the above assumption, Walter’s
formula determines the market price per share in the following way.
D
P = ke – g

Where,
P = The prevailing market price of a share.
D = Dividend per share
E = Earnings per share
r = The rate of return on the firm’s investment

The above equation shows that the value of a share is the present value of all dividends plus the
present value of all capital gains.

According to Walter's optimum dividend policy dependent on the relationship between the firm’s
return ® and its cost of capital (k). He suggests various types of firm they are:

i. When the firm is able to earn a return on investment exceeding the required rate of
return (i.e. r>ke). The value of shares is inversely related to the D/P ratio. If a firm
 has adequate profitable investment opportunities, it will be able to earn more than
what the investor expect so that r>k. Such firms may be called growth firms. For
growth firms, the firms should plugh back the entire earnings within the firm. The
market value of the shares will b e maximized as a result.
ii. When r>ke, N when the firm does not have large size sample profitable, investment
opportunities, the value of shares are positively correlated. If a firm does not have
profitable investment opportunities(when r<k), the shareholders will be better-off if
earning are paid out to them so as to enable then to earn a higher return by using the
funds elsewhere. In such a case, the market price of shares will be maximized by the
distribution of the entire earnings as dividends. a D/p ratio of 100 would give an
optimum dividend policy, In other words, as the payout ratio increases, the market.
Where,
P = Price of equity shares
D = Initial dividend
ke = Cost of equity capital
g = Expected growth rate of earnings.
To reflect earnings retentions, we have
D
P = ke – rb

Where,
r = Expected rate of return on firm’s investments.
b = Retention rate (E – D) /E

Thus, rb measures growth rate in dividends, which is the product of the rate of profitability of
retained-earnings (r) and the earnings retention percentage (b). From the above equation, we
derive an equation for determining ke.
D
ke = P + g

∆P
Since g = P , we have

D ∆P
ke = P + P
 r
And since ∆P = k (E – D)
e

Substituting the value of AP, we have

r
D + ke (E – D)
ke = P
r
D + ke (E – D)
or, P= ke
Price of the shares also increases. With 100% D/p ratio the value is the highest, while it is the
lowest with D/p ratio being zero. When r < ke, the firm would be well and wised to distribute the
entire earnings to the shareholders.

For a situation in which r = ke (normal firms)

The market value of shares is constant irrespective of D/P ratio, no optimum dividend policy D/P
ratio. It is a matter of indifference whether earnings are retained or distributed. This is so because
for all D/P ratios (ranging between zero and 100) market price of shares will remain constant for
such firms, there is no optimum dividend policy (D/P ratio). In other words, the market price of
shares is not affected by the D/P ratio). Whether the firm retains the profits or distributes
dividends is a matter of indifference. This is a hypothetical situation. In real practice, the two
values (r and ke) are different and Walter concludes that dividend policy does matter as a
variable maximizing share prices.

2.2.5. Holder Langreh and Hexter's Study (1998)

M.E. Holder, F.W Langreh and Hexter’s studied on “Dividend policy determinates. An
Investigation of the influences of stakeholders on firm” dividend policy by examining the
interaction between the dividend and investment policies (Holder, et. al.1998:73-82).

The Model used in the study was:

Dpit = β0 + β1F sit + β2 LSALE sit + β3Inist + β4 LCSHR it +β5 + FCfit + β6 + GROW
it + β7 STDit + Et
Where,
Dpit = smoothed dividends payout ratio for firm in fiscal year t.
 Fsit = Measure of the focus of firm i in year t.
LSALESit = Natural log of sales of firm I in year t.
INSit = Residual of insider ownership for firm I in year regressed LSALES
LCSHRit = Residual of Natural log of number of common shareholders for firm I in year
regressed on LSALES.
FCFit = Free cash flow for firm I year t.
GROWit = Sales growth of firm I in using prior five years.
STD = Standard deviation of Monthly returns of firm in year t.

They used above Mentioned regression equation as the basis for testing their hypothesis of
relationship between the NOC (Net Organizational Capital) of a firm and its dividends payout.
They developed Model with data from 477 firms over an eight year period (i.e. 1983-1990) for a
total of 3816 observation, and used a pooled time series cross sectional analysis.

The Major findings of the study were:

The coefficient of corporate focus on NOC is negative and statistically significant indicating a
negative inference on dividend payout ratio.
• Large firms tend to have higher payout ratios, compared to smaller firms larger firms
have easier access to the capital Markets and are therefore less dependent on internal
funds. Therefore, they can afford to pay higher dividends.
• Insider ownership negatively and pay out. Firms with a higher percentage of stock held
by insider will have lower agency costs and lower dividend payout ratio.
• Insider levels of free cash flow have higher agency costs and need higher dividend
payout ratios to reduce those agency costs.
• Dividend payout ratios is lower for higher risk firms.
• Sales growth is negatively and significantly related to dividend payout ratio. The
findings of the above Mentioned studies conducted in developed and big capital Market
May or May not applicable in Nepal where capital Market is small and is emerging one
as well as may not be directly comparable to that of Nepal. So here, attempts are made
to review same Major studies that are being Carried out in Nepal.
2.2.6. Pandey’s Study.
I.M. Pandey studied on corporate Dividend behavior and Analysis of Dividend policy in
practice: Case of CARSEN and TOUBRO. It has been conducted based on the data from 1976 to
1987.

A stable payout ratio results fluctuating dividend per share pattern, which could be a cause of
uncertainty for investors. In practice; firms express their dividend policy either in terms of
dividend per share or dividend rate. Does this mean that payout ratio is not considered important
by firms while determining their dividend policies? Winter in this study conducted in context of
U.S.A, found that forms generally think in terms of proportion of earnings to be paid out.
Investment requirements are not considered for modifying the pattern of dividend behavior. Thus
firms generally have target payout ratios in view while determining change in dividend per share
(or dividend rate). Let us assume that a firm has EPS, as the expected earnings per share in the
current year and p as the payout ratio. If the firm strictly follows stable payout policy, the
expected dividend per share DIV, is:
DIV, = pEPSt ………………………………….. (i)
And dividend change (as compared to the dividend per share of the previous year, DIV0)
will be:
DIV1– DIV0 = pEPSt — DIV0 ………………………….. (ii)

But in practice, firms do not change the dividend per share (or dividend rate) immediately with
change in the earnings per share. Shareholders like a steadily growing dividend per share. Thus
the firm change their dividends slowly and gradually even when there are large increases in
earnings. This implies that firms have standards regarding the speed with which they attempt to
move to wards the full adjustment of payout to earnings. Linter has therefore suggested the
following to explain the change in dividends of firms in practice.
DIVt – DIV0 = b (pEPSt – DIV0) ………………………….. (iii)

Where b is the speed of adjustment. A conservative company will move slowly towards its
target payout.
The implication of equation (iii) are (a) that firms stabiles their dividends in accordance with the
level of current earnings and (b) that the change in dividends over time do not correspond exactly
with changes in earnings in the immediate time period. Iii other words, dividend per share
depends on the firm's current earnings (EPSI) as well as the dividend per share of the previous
year (DIVo): the previous year’s dividend per share depends on the year’s earning per share and
the dividend per share in the year before.

2.3 Review of Major Studies in Nepalese Perspective.

2.3.1. Manandhar’s Study (1998)
Manandhar studied on dividend policy and value of the firm in 1998. The aim of study was to
identify some important financial variable that are significant to the value of the firm (Manandhar
1998: 15-20).
The study was based on the secondary financial data of tea leading companies of the year
1995/96 published by Nepal Stock Exchange Ltd. in trading report 2052/53, Vol.2.
The selected ten companies taken for the study were as:
a. Nepal Bank Ltd.
b. Standered Chartered Bank Ltd.
c. Nepal SBI Bank-, Ltd.
d. Himalayan Bank Ltd.
e. Nepal Indosuez Bank Ltd.
f. Nabil Bank Ltd.
g. Bishal Bazar Company Ltd.
h. Harishidhi Brick and Tiles Factory.
i. National Life and General Insurance Com. Ltd.
j. Soaltee Hotel Ltd.
He used multiple regressions to achieve the objective. The regression equation was:
y = f(X 1, X2, X3, X4, X5)
Where,
X1 = represents DPS Equity dividend divided by number of equity shares.
X2 = represents EPS Net income divided by number of equity shares.
X3 = represents P/E Closing price divided by EPS.
 X4 = represents ROE = EPS divided by paid up price Multiplied by 100.
X5 = represents D/P = DPS divided by closing Market price.
After analysis, the result was found as DPS and ROE have positive impact on Market
capitalization. EPS, P/E, and D/P has negative impact on market capitalization. Specially, for
dividend it was concluded that there is significant relationship between market capitalization end
DPS. DPS was regarded as one of the significant determinant of market capitalization. In
conclusion that dividend policy is relevance in stock valuation based on DPS.
2.3.2 Adhikari's Study (1999)
Navaraj Adhikari (1999) carried out a research on "Corporate Dividend Practices in Nepal."
using primary and secondary data.
The main objectives of his research are:
• To analyze the properties of portfolios formed on dividend.
• To examine the relationship between dividend and stock prices.
• To survey the options of financial executive son corporate dividend practices.
Major findings are
1. Financial positions of high dividend paying companies are comparatively better than
that of low dividend paying companies.
2. Market price of stock both finance and non-finance are affected by dividends.
3. There is positive relationship between dividend and stock price.
4. There is a negative relationship between dividend payout and earnings before tax to net
worth.
5. Stock with larger ratio of DPS to book value per share has higher profitability. These
profitability ratios of stocks paying smaller dividend.
6. Companies paying higher dividend are reluctant to employ higher degree of leverage in
their capital structure.
7. The stocks with large ratio of dividend per share to book value per share have also
higher turnover ratio and higher interest coverage.

2.3.3 Budhathoki's Study(2006)

Kishor Kumar Budhathoki has carried on a research on " The study of Dividend Policy of
Commercial Banks in Nepal". The main objectives of study were :
• To highlight the dividend practices of commercial banks.
 • To compare the dividend policy followed by selected commercial banks.
• To provide some fruitful suggestions to selected banks that can be implemented easily and
possible guidelines to overcome various issues and gaps based on the findings of analysis.
Major findings of this study are:
1. The average EPS of banks under study shows a positive result. But the coefficient of
variation indicates that there is no consistency of EPS.
2. The average DPS shows that there is no regularity in dividend payment.
3. The analysis of DPR shows that the DPR of banks is not stable.
4. The average market price shows that there is quite high level of fluctuation.

2.3.4 Jha's Study(2007)

Pawan Kumar Jha has performed a thesis on Dividend Policy: a comparative study between
banks, insurance companies and financial institution, with eight years data relating to dividend
policy from 2053/54 to 2061/62. The main objectives of study were :
• To highlight dividend practice of bank, insurance and finance companies.
• To analyze the relationship of dividend with various important variables.
Major findings of this study are:
1. Government of Nepal, NRB, SEBON and NEPSE should be conscious to discourage
market imperfection.
2. Companies should have long term policy regarding the adoption of suitable dividend
policy.
3. Even if earning has not been increased, the DPS has been widely fluctuated. Distribution
of bonus share should be pre-evaluated.
4. It needs a proper information discloser to the investors.

2.3.5 Bista's Study (2008)

Surendra Bista has presented the thesis entitled "Dividend Poliies and Practices in Nepal: A
comparative studies of listed joint venture banks and manufacturing companies". He has
analysed the data of three joint venture companies and three manufacturing companies. The
major objectives of the study were:
• To examine the relationship between dividend and market price of the stock.
 • To identify the appropriate dividend policy followed by listed banks and manufacturing
companies.
• To analyse the similarities and differences of dividend policy decision of banks and
manufacturing companies.
Major findings of this study are:
1. The banks and manufacturing companies do not follow any specific dividend policy.
DPR are fluctuating over the periods of those selected companies.
2. MPS do not any specific trend, it fluctuates the future price.
3. There is not any specific trend of EPS in these companies.
4. There is great difference between market value per share and book value per share.

2.3.6. Kafle's Study (2009)

Kafle has presented an MBS thesis entitled "Dividend Policy of Commercial Banks in Nepal" with
special reference to HBL, EBL and NIBL. The main objectives of this study are as follows:
• To study dividend procedures followed by sample banks.
• To identify, whether DPS affected by the EPS in sample banks.
• To analyse the relationship between DPS with various important variables such as EPS, net
profit, net worth and book value per share.
Major findings of this study are:
1. In HBL, DPS trend is increasing even in fiscal year 2004/05, when EPS is decreased.
In EBL, EPS is in increasing trend, DPS is also in increasing trend except fiscal year
2004/05.
2. In NIBL, EPS and DPS both trend is fluctuating. The implications of fluctuating
earning per and dividend per share could not make clear to the public.
3. MPS is much higher than net worth per share in case of EBL. This indicates that the
investors either have a optimastic view on the future performance of company or that
they are not investigating the performance indicators of the companies in which they
are investing properly.
4. DPS is positively correlated with EPS, net profit, market price per share and net
worth in all sample banks. It means the higher EPS, net worth and net profit, higher
will be dividend per share and vice versa.
2.3.7 Dhungel's Study (2009)
Dhungel has presented an MBS thesis entitled "A study on Dividend Policy of Everest Bank
Limited and Bank of Kathmandu". The main objectives of this study are as follows:
• To identify what type of dividend policy being followed by selected companies.
• To highlight dividend practices of Bank of Kathmandu and Everest Bank Limited.
• To analyse the relationship between dividend per share and other important variables
such as earning per share, net profit, net worth and stock prices.
Major findings of this study are:
1. EBL has higher earning capacity than BOK and paying more dividend than BOK.
2. On the basis of DPR, it can be considered that BOK has paid higher portion of its
earnings as dividend since average DPR of BOK is higher than that of EBL.
3. Average dividend yeild indicates that BOK is providing more percentage of its
market value per share than EBL.
4. Average earning yeild ratio of BOK is greater than that of EBL, which means BOK is
more efficient to generate earning on the basis of market price.
5. EBL remained more successful than BOK in satisfying its shareholders through
distributing cash and bonus share dividend, generating higher amount of earning per
share, maintaining higher market value of its share.

2.3.8 Silwal's Study (2010)

Shambhu Sharma Silwal has presented an MBS thesis entitled "A study on Dividend Policy of
Commercial Banks in Nepal and It's Effect to Market Price of Share". He has taken NABIL
Bank, Standard Chartered Bank Nepal Limited, Everest Bank Limited, Nepal Industrial and
Commerce Bank Limited and Bank of Kathmadu as Sample cosidering the data period FY
2003/04 to 2007/08. The main objectives of this study are as follows:
• To examine whether, the commercial banks are following the suitable dividend policy or
not.
• To analyse and evalute the application of dividend decision on selected banks.
• To analyse the relationship of dividend policy with various financial indicators like EPS,
DPS, MPS, DPR, P/E ratio and net profit of sample banks.
Major findings of this study are:
 1. DPS of sample banks in average shows that there is not regularity in dividend
payment.
2. The average highest DPR is 68.57% of SCBNL and lowest is 11.25% of NIC. The
analysis of CV of DPR indicates that SCBNL has least fluctuation i.e. 17.02% and
NIC has most fluctuation i.e. 146.13% among the sample banks.
3. The average EPS of the banks under study shows positive result. However, the CV
indicates that there is no consistency in EPS. The CV of EPS range is in between
10.84% to 69.09%. Among the sample banks, SCBNL has highest average EPS with
low fluctuation and NIC has lowest EPS.
4. The study of impact of cash dividend on market price of share revealed that DPS has
positive impact on MPS in NABIL, SCBNL and EBL. But negative impact has been
found in BOK, NIC and bank pooled average, which indicates the MPS of NIC and
BOK is influenced by any other factors.
5. With respect to impact of DPR on valuation of share, negative impact has been found
of sample commercial banks. DPR affects the market price of stock differently.
6. The multiple regression analysis of MPS on EPS and DPS, it has been found that
there is positive relation between MPS and EPS, but negative between MPS and DPS.
7. The DPS and EPS are positively correlated in sample banks which mean higher the
EPs higher will be DPS.

2.4. Research Gap

There have been several researches done in past about dividend policy and practices about
various banks and financial institutions taking consideration of various financial and statistical
tools. In this context, previous studies cannot be ignored because they provide the foundation of
the present study. The purpose of this study is to draw some ideas concerning to the dividend
policy and practices in Nepalese commercial banks and receive some new ideas, knowledge and
suggestions in relation. It is expected that the uncovered area of past research will be studied in
this research. Moreover the earlier studies on dividend have become old and need to be updated
and validated because of the rapid changes taking place in financial market of Nepal. So this
study on dividend policy in the context of Nepalese commercial banks is based on secondary
data of three joint venture banks.
 CHAPTER-III

RESEARCH METHODOLOGY

Research methodology is related to the specific problem of limited scope for which management
has need of additional information on which to base a decision. Research has one feature. It
concerns the seeking of solutions as to what should be done to solve a given problem and how to
implement the solution. Research tends to be future and present oriented as opposed to taking an
interest in the effectiveness of prior actions. According to the F.N. Kerlinger,"Research
methodology is a vital and absolutely indispensable part of social scientific and educational
research. Without methodology research, modem social scientific and educational research
would still be in the dark age." Research Methodology mainly describes the technique, method
and process applied in the entire process of a scientific research." Research Methodology refers
to the various sequential steps to be adopted by a researcher in studying a problem with certain
objectives in view."Research methodology explains the methods used in the study including
presentation of research design." (Pant; 2009: 328)
Research methodology describes the method and process applied in the entire aspect of the
study. Research methodology refers to the various sequential steps to adopt by a researcher in
studying a problem with certain objectives in view. So the purpose of this chapter is to outline
the methods and sequential steps adopt in analyzing the problem.

3.1 Research Design

The research design is the plan, structure and strategy of investigation conceived so as to
obtained answers to reason questions and to control variance (Kerlinger; 1994).The analysis of
the study is based on certain research design keeping in mind on the objective of the study.
"Research design describes the general plan for collecting, analyzing and evaluating data. It is
integrated systems that guides the researcher in formulating, implementation and control the
study." (Pant; 2009). Research design refers to a series of stage in conducting study. The
research design of this study will be more exploratory and analytical, using various phenomena
related and influencing the dividend decision and market price of stock. Descriptive and
analytical research design is used in this study. The annual reports published by the relative
banks and the financial statements of banks published by Nepal stock exchange Ltd. where
collected from the year 2004/5 to 2008/2009 to analyze, interprets and get the conclusion.

3.2 Population and Sample

There are 30 commercial banks incorporated (till Dec 2010) and doing there transaction in
Nepalese financial market. Among them, 23 banks' shares are traded in stock market; hence it is
not possible to study all of them regarding the study topic. Therefore sampling will be done
selecting from population. The population is as follows:
1 Nepal Bank Ltd.
2 Rastriya Banijya Bank.
3 Agricultural Development Bank
4 Nepal Arab Bank Ltd.
5 Nepal Investment Bank Ltd.
6 Nepal SBI Bank Ltd.
7 Nepal Bangladesh Bank Ltd.
8 Nepal Industrial & Commercial Bank Ltd.
9 Nepal Credit & Commerce Bank Ltd.
10 Standard Chartered Bank Ltd.
11 Himalayan Bank Ltd.
12 Everest Bank Ltd.
13 Bank of Kathmandu Ltd.
14 Lumbini Bank Ltd.
15 Machhapuchre Bank Ltd.
16 Kumari Bank Ltd.
17 Laxmi Bank Ltd.
18 Siddhartha Bank Ltd.
19 Global Bank Ltd.
20 Citizen Investment Bank.
21 Prime Bank Ltd.
22 Bank of Asia Ltd.
23 Sunrise Bank Ltd.
 24 Development and Credit Bank Ltd.
25 Nepal Merchant Bank Ltd.
26 KIST Bank Ltd.
27 Janata Bank Limited
28 Megha Bank Limited
29 Commerze and Trust Bank Limited
30 Civil Bank Limited
The selected samples are as follows:
Due to constraints of time and resources, only three joint venture commercial banks of Nepal are
selected as sample in this study.
Selected sample banks of this study are as follows:
1 Standard Chartered Bank Ltd. (Joint-venture with Standard Chartered Bank Ltd U.K.)
2 Himalayan Bank Ltd.(Joint-venture with Habib Bank Ltd. Pakistan)
3 Everest Bank Ltd.( Joint-venture with Punjab National Bank Ltd. India)

3.3 Sources of Data

The study is based on secondary and primary data. The required data has been collected from the
"Financial statement of listed companies published by Nepal stock exchange Limited". The
related data are obtained from the annual reports published by concerned banks. Besides this
further data are collected from published and unpublished reports, journals, thesis etc. This study
is based on secondary data. The other various necessary informations were collected from
various institutions.

3.4 Method of Analysis

Various financial and statistical tools have been used in this study. The analysis of data will be
done according to pattern of data available. Financial tools and simple regression analysis will
do mainly the analysis. The relationship between different variables related to study topic would
be drawn out using financial and statistical tools. The main financial indicators EPS, DPS,
MVPS, D/P Ratio, P/E Ratio, Profitability Ratio, Liquidity Ratio and Market Value Per Share
will be calculate in this research, likewise statistical tools arithmetic mean, Simple regression
analysis, standard deviation, coefficient of correlation,t test, and F-test will be calculate in this
research.

3.6 Data Analysis Tools

A. Financial Tools
Under the financial tools, the following ratios has been calculated and interpreted:
1. Dividend Per Share (DPS)
DPS indicates -the part of earning distributed to the shareholders on per share basis. It is
calculated by dividing the total dividend to equity shareholder, the number of equity shares.
Total dividend to ordinary shares.
Total dividend to ordinary shares
DPS = No. of common ordinary share outsthanding

2. Earning Per Share (EPS)

EPS calculations made over the years indicate whether the banks earning power on per share
basis have changed over the period or not. EPS is calculated by dividing the net profit after tax
by the total number of common share outstanding.
Net profit after tax
EPS= No. of stock outstanding

3. Dividend Payout Ratio (D/P Ratio)

D/P ratio is percentage of profit that is distributed as dividend. This ratio reflects percentage of
profit is distributed as dividend and what percentage of profit is remained as reverse & surplus
for the growth of the company. It is calculated by DPS divided by the EPS.
Dividend per share
D/P Ratio = Earning per share

4. Price Earning Ratio (P/E Ratio)

This ratio reflects the price currently paid by the market for each rupee of current reported
earning per share (EPS). It is calculated by dividing the market value share (MVPS) by earning
per share.
P/E Ratio = Market Value Per share
Earnings Per Share
5. Dividend Yield Ratio (D/Y Ratio)
This ratio shows the relationship between dividend per share and market value per share. It is
calculated by dividing dividend per share by market value per share.
Dividend per share(DPS)
Dividend Yield Ratio = Market value per share(MVPS)

6. Profitability Ratio
Profitability ratio is calculated by dividing gross profit by total assets.
Gross profit
Profitability ratio = Total assets

7. Liquidity Ratio
This ratio is calculated through dividing current assets by current liabilities.
Current Assets
Liquidity Ratio = Current Liability

B. Statistical Tools
In the present study, certain statistical tools have been used to compare the Figures and draw one
meaningful conclusion there from. Short descriptions of the statistical tools have been presented
here.
1. Mean
The most popular and widely used measure of representing the entire data by one variable is the
arithmetic mean. The number of items obtains by adding together all items and by dividing this
total its value. Mean values of the different variable represent the average value for the study
period.

Arithmatic Mean ( X ) =
∑X
N
2. Standard Deviation
The measurement of the scatter necessary of the data from mass of Figure in a series able an
average is known as dispersion. The standard deviation - measures the absolve dispersion. The
greater the amount of dispersion greater the standard deviation. The small standard deviations
means a high degree of uniformity of the observation well as homogeneity of a series and vice-
versa. In this study, standard deviation calculated for dividend per share, earning per share,
dividend payout ratio, dividend yield and price earning ratio, profitability ratio, liquidity ratio
and market value per share.

Σ( X − X ) 2
S.D (σ) =
N
3. Coefficient of Variation
The coefficient of variation is the relative measure of dispersion, comparable across which is
defined as the ratios of the standard deviation to the mean expressed percent.
σ
C.V. = * 100%
X
4. Correlation Analysis
Correlation analysis is the statistical tools that can be used to describe the degree which one
variable is nearly related to another. In the present study simple correlation has been used.
Correlation co-efficient between the following financial variables has been calculated and
presented in matrix form and thereby interpreted throughly.
nΣXY − ΣXΣY
Correlation coefficient ( r ) = r =
nΣX − (ΣX ) 2 − nΣY 2 − (ΣY ) 2
2

Simple correlation coefficient

™ Between Earning Per Share and Dividend Per Share.
™ Between Earning Per Share and Market Value Per Share.
™ Between Dividend Payout Ratio and Market Value Per Share.
™ Between last year dividend per share and Market Value Per Share.

5. Regression Analysis
Correlation analysis tells the direction of movement but it does not tell the relative movement in
the variables under study. Regression analysis helps us to know the relative movement in the
variables. Regression analysis of the following variable.-, have been calculated and interpreted.
Simple Regression Analysis
I. Market Value Per Share on Earning Per Share.
This analysis enables us to known whether EPS is the influencing factor of market value per
share or not. At what extent the EPS affects the MVPS.
Y = a+ bX
Where,
 Y = market value per share
a = Regression constant
b = Regression coefficient
X = Earning per share

II. Market Value Per Share on last year Dividend Per Share
This analysis is examine the market value per share as depended variable on last year dividend per share
as independend variable.

Y= a + bX
Where,
Y = Market value per share
a = Regression constant
b = Regression coefficient
X = Last year Dividend per
share
III. Dependent Variable Dividend per Share (DPS) on Earning per Share (EPS)
This analysis is examine the dividend per share as depended variable on earning per share as independend
variable.
Y= a + bX
Where,
Y = Dividend per share
a = Regression constant
b = Regression coefficient
X = Earning per Share

6. Coefficient of Correlation ( r )
Correlation analysis is the statistical tools that we can use to describe the degree which one
variable is linearly related to another. The coefficient of correlation measures the degree of
relationship between two sets of Figures. In this study, simple coefficient of correlation is used
to determine the relationship of different factors with dividend and other variables. The data
related to dividend over different years are tabulated and their relationship with each other's is
drawn out.
7. Coefficient of Determination (r2)
The coefficient of determination is a measure of the degree of liner association or correlation
between two variable one of which happens to be independent and other being dependent
variable. In other word r measures the percentage total variation in dependent variables. The
coefficient of determination value can have ranging from zero to one. A value or one can occur
only if the unexpected variation is zero which simply means that all the data point in the scatters
diagram fall exactly on the regression line.

8 Regression Constant (a)

The value of constant, which is the intercept of the model, indicates the average level of
dependent variable when independent variable is zero. In other words, it is better to understand
that 'a' (constant) indicates the mean or average effect on dependent variable of all the variables
omitted from the model.

9. Regression Coefficient (b)

The regression coefficient of each independent variable indicates the marginal relationship
between the variable and value of dependent variable, holding constant the effect of all other
independent variables in the regression model. In other words the coefficient describes how
change in independent variables affects the values of dependent variables estimative.
C. Test of Hypothesis
Hypothesis is usually considered as the principal instrument in research. It can also be
considered as suggested solution of the research problems. Its main function is to suggest new
experiments and observations. With the available data decision-makers applied the hypothesis
testing and give the decision accordingly. It may not be proved absolutely but in practice it is
accepted if it has withstood a critical testing. Usually the statistical hypothesis is tested at 1%,
5% and 10% Level of significance. Thus, the significance test will be conducted in the analysis
of the data.
The hypothesis tests of this research work are:
I. First Hypothesis
Null Hypothesis (H0) :µ1 = µ2 = µ3
 There is no significant different in DPS on sample commercial banks.
Alternative hypothesis (H1): µ1 ≠ µ2 ≠µ3
There is significant difference in DPS on sample commercial banks.
II. Second Hypothesis
Null Hypothesis (H0) :µ1 = µ2 = µ3
There is not significant difference in EPS on sample commercial banks.
Alternative Hypothesis (H1) µ1 ≠ µ2 ≠µ3
There is significant difference in EPS on sample commercial banks.
3.6 Limitations of Methodology
• The analysis is based on secondary data.
 CHAPTER-IV

PRESENTATION AND ANALYSIS OF DATA

The presentation and analysis of data is the major part of the research study. The analysis of data has
been done according to the available data.The analysis includes several tools and techniques such as
financial tools and statistical toolsand attitude of management towards dividend decision.
In this chapter, collected data and other information on dividend policy and its impact on market
price of share of commercial banks are presented. This chapter concentrated in presentation and
analysis of data as important financial indicators. This chapter attempts to analysis of dividend per
share, earning per share, dividend payout ratio, dividend yield ratio price earning ratio, profitability
ratio, liquidity ratio, market value per share, correlation between financial variables and regression
equations of financial variables of selected commercial banks. Presentation and analysis of data is the
major part of the research study. So, that to achieve our objective of the study, we analyze the data
with the help of above financial and statistical tools. This chapter will attempt to make a comparison
among the concerned banks.
4.1 Analysis of Financial Indicators of Sample Banks
4.1.1. Dividend per Share Analysis
Table 1
Dividend per share (cash)
Year SCBNL HBL EBL
2004/05 120.00 11.58 0.00
2005/06 130.00 30.00 25.00
2006/07 80.00 15.00 10.00
2007/08 80.00 25.00 20.00
2008/09 50.00 12.00 30.00
Average 92.00 18.72 17.00
S.D. 32.71 8.32 12.04
C.V. 0.3556 0.4443 0.7083

Source : Annual Reports of the concerned banks

 Figure 4.

Fiscal Year
The study topic concerned to the dividend of the banks. It has taken the dividend paid by three
sample banks for the five different fiscal years. So it is very important at this stage to look over the
relevant data on dividend for the purpose of this analysis.

Above table shows the impact on dividend per share of the concerned JVBS from the year 2204/05
to 2008/09. In analysis period, SCBNL has paid the highest and EBL has paid lowest dividend to its
shareholders in average. In this period, SCBNL has paid Rs. 92.00 as DPS and HBL and EBL has
paid Rs. 18.72 and 17.00 DPS in average. Standard deviation of SCBNL is the highest and HBL is
the lowest among three banks for five years. In same way, CV of SCBNL is 35.56% which is lowest
and EBL is 70.83% that is highest among sample baks. This shows that DPS of SCBNL is more
consistent and stable than other two banks. In same way, DPS of EBL is less consistent and less
stable than others.

4.1.2. Earning per share (EPS) Analysis

All the business firms always seek to have and more earning so that they could sustain efficiently in
the competitive market. The following table shows all the details relating to earning per share of
respective banks.
 Table 2
Earning Per Share (In Rs.)

Year SCBNL HBL EBL

2004/05 143.14 47.91 54.22
2005/06 175.84 59.24 62.78
2006/07 167.47 60.66 78.42
2007/08 131.92 62.74 91.82
2008/09 109.99 61.90 99.99
Average 145.67 58.49 77.45
S.D. 26.71 6.06 19.17
C.V. 0.1834 0.1036 0.2476
Source : Annual Reports of the concerned banks

Figure 5

Fiscal Years

Above table shows that EPS of the concerned banks from 2007/05 to 2007/08. Normally, the
performance and the achievement of business organization are measured in terms of its capital to
generate earning. Higher earning shows higher strength while lower earning shows weaker strength
of business organization.
The table shows that the EPS of SCBNL is highest in every year while EPS of EBL & HBL are
lower respectively. The average EPS of SCBNL is Rs. 145.67 and average EPS of other two banks
HBL and EBL is Rs. 58.49 and Rs. 77.45 respectively. The EPS of SCBNL is highly fluctuated but
other two banks EPS is in increasing trend.

Standard deviation of SCBNL is the highest and HBL is the lowest among three banks for five
years. In same way, CV of HBL is 10.36% which is lowest and EBL is 24.76% which is the highest
among sample baks. This shows that EPS of HBL is more consistent and stable than other two
banks. In same way, EPS of EBL is less consistent and less stable than others.
4.1.3. Relationship between EPS and DPS
All earnings of business are not distributed as dividend. The organisation should have to retain the
earnings and create different types of funds for future growth and risk management. In this study,
how much earnings are distributed by selected JV banks to their shareholders. The following table
shows the relationship between earning per share and dividend per share of selected companies.
a) Relationship between EPS and DPS of SCBNL
Table 3
Relationship between EPS and DPS of SCBNL

DPS Stock Total % Change in % Change in

year EPS cash dividend DPS EPS DPS
2004/05 143.14 120.00 0.00 120.00 0.00 0.00
2005/06 175.84 130.00 10.00 140.00 22.84 16.67
2006/07 167.47 80.00 50.00 130.00 -4.76 -7.14
2007/08 131.92 80.00 50.00 130.00 -21.23 0.00
2008/09 109.99 50.00 50.00 100.00 -16.62 -23.08
Source : Annual Reports of the concerned banks
Above table shows the relationship between EPS and DPS of SCBNL of analysis period.
In the year 2004/05 EPS of SCBNL is Rs.143.14 and it gives Rs.120 cash dividend per share and no
stock dividend.
Likewise in 2005/06 EPS has increased to Rs.175.84 and gives cash dividend of Rs.130 per share
and stock dividend 10%. The total dividend per share is Rs. 140. In this fiscal year, EPS of company
is increased by 22.84% and DPS also incerased by 16.67% consequently in comparision to previous
year.

In year 2006/07, the EPS of company is decrease by 4.76% in coparision to previous year.
In this year, company has distributed the cash dividend of Rs. 80 and stock dividend of 50%.
The total dividend per share is Rs. 130. In this year, DPS has decreased by 7.14% as
decreased of EPS.
In same way, company has taken the decision to distribute dividend as per its earnings.
There is legal provision to increase the paid up capital of comercial banks up to Rs. 2000
million. So, company has distributed the stock dividend by 50% and cash dividend as per
earnings of company in last two fiscal years.

b) Relationship between EPS and DPS of HBL

Table 4
Relationship between EPS & DPS of HBL
DPS Stock
year EPS cash dividend Total DPS % Change in EPS % Change in DPS
2004/05 47.91 11.58 20.00 31.58 0.00 0.00
2005/06 59.24 30.00 5.00 35.00 23.65 10.83
2006/07 60.66 15.00 25.00 40.00 2.40 14.29
2007/08 62.74 25.00 20.00 45.00 3.43 12.50
2008/09 61.90 12.00 31.56 43.56 -1.34 -3.20
Source : Annual Reports of the concerned banks

Above table shows the relationship between EPS & DPS of HBL during the period of 2004/05 to
2008/09.

In the year 2004/05 EPS of HBL is Rs.47.91 and it gives Rs.11.58 cash dividend per share and 20%
of stock dividend (total DPS is Rs. 31.58).
Likewise in 2005/06 EPS has increased to Rs.59.24 and gives cash dividend of Rs.30 per share and
stock dividend 5%. The total dividend per share is Rs. 35. In this fiscal year, EPS of company is
increased by 23.65% and DPS also incerased by 10.83% consequently in comparision to previous
year.

In year 2006/07, the EPS of company is increase by 2.40% in coparision to previous year. In
this year, company has distributed the cash dividend of Rs. 15 and stock dividend of 25%.
The total dividend per share is Rs. 40. In this year, DPS has increased by 14.29% as
increased of EPS.
In same way, company has taken the decision to distribute dividend as per its earnings.
There is legal provision to increase the paid up capital of comercial banks up to Rs. 2000
million. So, company has distributed the stock dividend and cash dividend as per earnings of
company in last two fiscal years respectively.
c) Relationship between EPS and DPS of EBL
Table 5
Relationship between EPS & DPS of EBL
DPS Stock %Change in %Change in
year EPS cash dividend Total DPS EPS DPS
2004/05 54.22 0.00 20.00 20.00 0.00 0.00
2005/06 62.78 25.00 0.00 25.00 15.79 25.00
2006/07 78.42 10.00 30.00 40.00 24.91 60.00
2007/08 91.82 20.00 30.00 50.00 17.09 25.00
2008/09 99.99 30.00 30.00 60.00 8.90 20.00
Source : Annual Reports of the concerned banks
The above table 7 shows the relationship between EPS & DPS of EBL during the period 2004/05
to 2008/09.In the year 2004/05 EPS of EBL is Rs.54.22 and it gives 20% of stock dividend and no
cash dividend.Likewise in 2005/06 EPS has increased by 15.79% and reached to Rs.62.78 and gives
cash dividend of Rs.25 per share and no stock dividend. In this fiscal year, EPS of company is
increased by 15.79% and DPS also incerased by 25% consequently in comparision to previous year.
In year 2006/07, the EPS of company is increase by 24.91% in coparision to previous year and
reached to Rs. 78.42. In this year, company has distributed the cash dividend of Rs. 10 and stock
dividend of 30%. The total dividend per share is Rs. 40. In this year, DPS has increased by 60% as
increased of EPS.
In same way, company has taken the decision to distribute dividend as per its earnings. The
company has paid the cash dividend of Rs. 20 and Rs. 30 and stock dividend 30% equally in
2007/08 and 2008/09 respectively. There is legal provision to increase the paid up capital of
comercial banks up to Rs. 2000 million. So, company has distributed the stock dividend and cash
dividend as per earnings of company in last two fiscal years respectively.
4.1.4. Retained Earning Analysis
Table 6
Retained Earning Analysis (In mill.)
Year SCBNL HBL EBL
2004/05 245.20 158.17 62.50
2005/06 251.30 156.55 46.90
2006/07 557.72 168.38 70.50
2007/08 383.28 96.84 83.74
2008/09 239.49 36.52 82.44
Average 335.40 123.29 69.22
S.D. 137.95 56.09 15.25
C.V. 0.4113 0.4549 0.2204
Source : Annual Reports of the concerned bank
Figure 6
Above table shows that the Retained earning of the concerned banks from the year 2004/05 to
2008/09.
Retained earning means the earnings that retained by organisation to invest in profitable projects. In
the year 2004/05 RE of SCBNL, HBL & EBL are Rs. 245.20, 158.17 and 62.50 million respectively.
In the year 2005/06, RE of all banks is Rs. 251.30, 156.55 and 46.90 million respectively. In same
way, RE of all banks is Rs. 557.72, 168.38 and 70.50 million in 2006/07 and 383.28, 96.84 and 83.74
million in 2007/08. In year 2008/09, RE of all banks is Rs. 239.49, 36.52 and 82.44 million
respectively.
The average analysis shows that RE of SCBNL is 335.40 m., HBL is 123.29 m. and EBL is 69.22
respectively. The volume of retained earning is affected by dividend pay out ratio of company.
4.1.5. Market Value per Share Analysis
Table 7
Market value per share analysis (In times)
Year SCBNL HBL EBL
2004/05 2345.00 920.00 870.00
2005/06 3775.00 1100.00 1379.00
2006/07 5900.00 1740.00 2430.00
2007/08 6830.00 1980.00 3132.00
2008/09 6010.00 1760.00 2455.00
Average 4972.00 1500.00 2053.20
S.D. 1852.35 461.52 911.28
C.V. 0.3726 0.3077 0.4438
Source : Annual Reports of the concerned bank
Figure 7
Table 7 shows that the market price per share of the concerned banks from the year 2004/05 to
2008/09.
Market value per share means to evaluate value of share in the market. In the year 2004/05 MVPS
of SCBNL, HBL & EBL are Rs.2345, Rs. 920 and Rs. 870 respectively. In the year 2005/06 MVPS
of all banks increases to Rs.3775, Rs. 1100 and Rs. 1379 respectively.

In the year 2006/07 MVPS of all bank’s are highly increased i.e. SCBNL’s Rs.5900, HBL’s RS.1740
and EBL’s Rs.2430. The MVPS of related banks are increased to 2007/08 and decreased in 2008/09.
The average of MVPS of concerned banks is Rs. 4972, Rs. 1500 and Rs. 2053 in analysis period.
The coefficient of variation analysis shows that MVPS of HBL is most consistent among the sample
banks i.e. 30.77% & C.V. of SCBNL and HBL are 37.26% and 44.38% respectively. MVPS of all
banks are increased up to 2007/08 and decreased in the year of 2008/09.

4.1.6. Dividend payout Ratio Analysis

Dividend payout ratio is percentage of profit that is distributed as dividend. This ratio reflects
percentage of profit is distributed as dividend and what percentage of profit is remained as
reverse & surplus for the growth of the company. It is calculated by DPS divided by the EPS.
Table 8
Dividend Payout Ratio (In %)

Year SCBNL HBL EBL

2004/05 83.83 65.91 36.88
2005/06 79.63 59.08 39.82
2006/07 77.67 65.94 51.00
2007/08 98.54 71.72 54.45
2008/09 90.91 70.37 60.00
Average 86.12 66.60 48.43
S.D. 8.60 4.95 9.80
C.V. 0.0999 0.0743 0.2024
Source : Annual Reports of the concerned bank
 Figure 8

The table 8 shows that the dividend payout ratio of the three sample banks from the year
2004/05 to 2008/09. In the year 2004/05 HBL & EBL have paid 65.91% and 36.88%
respectively. Where as SCBNL has paid higest persent of dividend i.e.83.83%.

In year 2005/06, 2006/07, 2007/08 and 2008/09, dividend payout ratio of SCBNL is the highest
among the banks that is 79.63%, 77.67%, 98.54% and 90.91% respectively and D/P ratio of
HBL is 59.08%, 65.94%, 71.72% and 70.37% . The dividend payout ratio of EBL is lowest
among the banks that is 39.88%, 51.00%, 54.45% and 60.00% in analysis period. The average
dividend payout ratio of sample banks is 86.12%, 66.60% and 48.43% respectively. Among
them, average dividend pay out ratio of SCBNL is highest and EBL is the lowest. After
analysing the average D/P ratio, it can be concluded that SCBNL has paid the highest amount
as dividend to its shareholders from its earning and EBL has paid the lowest one among sample
banks.

The calculation of the coefficient of variation of the D/P ratio of three banks suggests that D/P of
HBL is more consistent (i.e. 4.95% deviation) with 7.43% CV. Where the C.V. of SCBNL and EBL
is 9.99% and 20.24% in analysis period.
4.1.7. Dividend Yield Ratio Analysis
This ratio shows the relationship between dividend per share and market value per share. It is
calculated by dividing dividend per share by market value per share. Dividends yield ratio is
highly influences by the market value per share. The ratio highly influences the market value per
share because change in dividend per share can bring effective change in market value of that
share. Therefore, before allocation of a market scenario and price fluctuation it is to be studied
and evaluated for the long run survival of the company.
Table 9
Dividend Yield Ratio (In %)

Year SCBNL HBL EBL

2004/05 5.11 3.43 2.29
2005/06 3.70 3.18 1.81
2006/07 2.20 2.29 1.64
2007/08 1.90 2.27 1.60
2008/09 1.66 2.90 2.44
Average 2.91 2.81 1.96
S.D. 1.46 0.52 0.39
C.V. 0.5017 0.1856 0.1970
Source : Annual Reports of the concerned bank

Figure 9
Above table shows dividend yield analysis for the year 2004/05 to 2008/09. In the year 2004/05
data related to dividend yield of SCBNL, HBL & EBL are 5.11%, 3.43% and 2.29%. In next years,
this ratio is decrease for SCBNL. DY ratio of this bank is 3.70%, 2.20%, 1.90% and 1.66% in
analysis period. In same way DY of HBL is decreased till 2007/08 i.e. 3.18%, 2.29% and 2.27% and
increased in 2008/09 to 2.90%. DY of EBL is also decreased till 2007/08 i.e. 1.81%, 1.64% and
1.60% and increased in 2008/09 to 2.44%.

In average, SCBNL dividend yield ratio i.e. 2.91% is highest at all and EBL is the lowest i.e.1.96%.
The dividend yeild ratio of HBL is 2.81% in average.
The coefficient of variation analysis shows that the DY of HBL has least fluctuation with least CV
value of 18.56% while SCBNL has highest CV of 50.17% that shows the highet fluctuation of
dividend yeild ratio.

4.1.8. Price Earning Ratio Analysis

This ratio reflects the price currently paid by the market for each rupee of current reported
earning per share (EPS). It is calculated by dividing the market value share (MVPS) by earning
per share. PE ratio is the investor's exception towards the company's financial performance. It
gives the knowledge of financial protection towards owner which also indicated the market
appraisals of the different banks.
Table 10
Price Earning Ratio (In times)
Year SCBNL HBL EBL
2004/05 16.38 19.20 16.05
2005/06 21.47 18.57 21.97
2006/07 35.23 28.68 30.99
2007/08 51.77 31.56 34.11
2008/09 54.64 28.43 24.55
Average 35.90 25.29 25.53
S.D. 17.27 5.98 7.19
C.V. 0.4810 0.2364 0.2818
Source : Annual Reports of the concerned bank
 Figure 10

The table 10 describes the price earning ratio of the three sample banks. This study helps us to study
the relationship between earning per share and market value per share. In the year 2004/05 and
2005/06, all banks PE ratios are below 25 times. Then PE ratio of selected banks is gone up rapidly.
The PE ratio of SCBNL is 35.23, 51.77 and 54.67 times in 2006/07, 2007/08 and 2008/09
respectively. This ratio of HBL is 28.68, 31.56 and 28.43 times and EBL is 30.99, 34.11 and 24.55
times in this period.

Average PE ratio of SCBNL, HBL & EBL are 35.90 times, 25.29 times and 25.53 times respectively
in analysis period.
The coefficient of variation analysis shows that the PE ratio of HBL is least fluctuation i.e. 23.64%
of VC. On the other hand C.V. of SCBNL is highest i.e. 48.10%. This shows that PE of SCBNL is
highly fluctuated in analysis period.

4.1.9. Profitability Ratio Analysis

Profitability ratio is the ratio between gross profit and total assets of company. It is calculated by
dividing gross profit by total assets.The greater the ratio shows the better performance of
company.
 Table 11
Profitability Ratio Analysis ( in %)

Year SCBNL HBL EBL

2004/05 2.46 1.11 1.40
2005/06 2.56 1.55 1.50
2006/07 2.42 1.47 1.40
2007/08 2.46 1.76 1.70
2008/09 2.53 1.91 1.73
Average 2.49 1.56 1.55
S.D. 0.06 0.31 0.16
C.V. 0.0230 0.1958 0.1035
Source : Annual Reports of the concerned bank
Figure 11

The table 11 shows profitability ratio analysis of selected joint venture banks for the year 2004/05 to
2008/09.
In the analysis five years period, the profitability ratio of SCBNL is 2.46%, 2.56%, 2.42%, 2.46% and
2.53% respectively. In same period this ratio of HBL is 1.11%, 1.55%, 1.47%, 1.76 and 1.91% where
as profitability ratio of EBL is 1.40%, 1.50%, 1.40%, 1.70% and 1.73% in analysis period. This
shows that profitablity ratio of all sample banks are in increasing trend. The average profitabilty ratio
of sample banks is 2.49%, 1.56% and 1.55% respectively. After analysing the average profitability
ratio, the profitability of SCBNL is the highest among three banks and we can concluded that the
performance of SCBNL is best among three sample banks.
The coefficient of variation analysis shows that the profitability ratio of SCBNL is least fluctuating
with CV of 2.30% and SD of 0.06 while profitability of HBL and EBL is highly fluctuating with CV
of 19.58% and 10.35% respectively.
4.1.10. Liquidity Ratio Analysis
Liquidity ratio is the ratio between current assets and current liability of company. This ratio is
calculated through dividing current assets by current liabilities.
Table 12
Liquibility Ratio (In times)
Year SCBNL HBL EBL
2004/05 8.77 7.86 1.90
2005/06 6.86 5.92 1.90
2006/07 5.46 5.92 2.90
2007/08 5.84 5.13 3.40
2008/09 8.18 6.76 2.83
Average 7.02 6.32 2.59
S.D. 1.44 1.04 0.66
C.V. 0.2046 0.1641 0.2566
Source : Annual Reports of the concerned bank
Figure 12
The table 12 shows that the liquidity ratio of the three sample bank for past five years. In analysis
period, the current ratio of SCBNL is 8.77, 6.86, 5.46, 5.84 and 8.18 times. This ratio of HBL is 7.86,
5.92, 5.92, 5.13 and 6.76 times in analysis period. The current ratio of EBL is also 1.90, 1.90, 2.90,
3.40 and 2.83 times in analysis period. Average of this ratio is 7.02, 6.32 and 2.59 times which
indicate the liquidity condition of all banks is in satisfactory level. Even though the liquidity position
of SCBNL is most satisfactory than others and EBL's condition is in considerable level.

The coefficient of variation of liquidity ratio of these three banks are 20.46%, 16.41% and25.66%
respectively. It shows that liquidity ratio of HBL is lowest fluctuation among three sample banks.
4.2. Correlation Analysis
Correlation analysis is the statistical tools that we can use to describe the degree to which one
variable is linearly related to other variables. It deals to determine the degree of relationship between
two or more variables. Its value is limited between the range +1 & -1. Thus if the variable were
perfect correlated, returns on these would move up and down together. The variable of such would
be exactly as risky as the individual stocks.

The variable negatively correlated would more perfectly together but in exactly opposite direction.
In this audition, risk can be eliminated completely. But perfect negative correlation almost never find
in the real world. The correlation between different variables, their coefficients, probable errors and
interpretation are presented in following tables.
4.2.1 Correlation between EPS and DPS
Table 13
Name of Bank Correlation Relatioship Coefficient Probable Error Significant/
coefficient (r) between Determinant (PE) Insignificant
variables (r²)
SCBNL 0.8624 positive 0.7437 0.0771 significant
HBL 0.8630 positive 0.7447 0.0768 significant
EBL 0.9990 positive 0.9935 0.0019 significant
Source : Appendix 3

Table no. 13 shows the relationship between EPS and DPS of three sample banks. It is observed
that correlation coefficient(r) between EPS and DPS of sample banks is positive. Correlation
cofficient of sample banks is more than 0.75 which inducates that EPS and DPS of banks are
strongly correlated.

The coefficient of determinant is more precise measure of strenth of the relationship between two
variables and trends itself to more precise interpretation because it can be presented as a portion or
as a percentage. The coefficient determinant between EPS and DPS of SCBNL is 0.7437, which
means that the EPS determines 74.37% of variation in DPS. In same way, EPS determines 74.47%
and 99.35% variation in DPS of HBL and EBL respectively.

The Probable Error (PE) is used to measure the reability and test of significance of correlation
coefficient. PE is used in interpretation whether the calculated value of r is significant or not. If r
< P.E., it is insignificant i.e. there is no evidence of correlation. If r> 6 P.E., it is significant. In
above table all banks correlation coefficient is significant.

4.2.2 Correlation between EPS and MVPS

Table 14
Name of Bank Correlation Relatioship Correlation Probable Error Significant/
coefficient (r) between Determinant (PE) Insignificant
variables (r²)
SCBNL -0.3628 Negative 0.1316 0.2614 Insignificant
HBL 0.8298 Positive 0.6886 0.0937 Significant
EBL 0.8915 Positive 0.7947 0.0618 Significant
Source : Appendix 1

Table 14 shows the relationship between EPS and MVPS of three sample banks. It is observed that
correlation coefficient(r) between EPS and MVPS of SCBNL is negative and rest of two banks is
positive. Correlation cofficient of SCBNL is -0.3628 which indicates EPS and MVPS is not
correlated. Other banks correlation coefficient is more than 0.75 which inducates that EPS and
MVPS of banks are strongly correlated.

The coefficient of determinant is more precise measure of strenth of the relationship between two
variables and trends itself to more precise interpretation because it can be presented as a portion or
as a percentage. The coefficient determinant between EPS and MVPS of SCBNL is 0.1316, which
means that the EPS determines 13.16% of variation in MVPS. In same way, EPS determines 68.86%
and 79.47% variation in MVPS of HBL and EBL respectively.

The Probable Error (PE) is used to measure the reability and test of significance of correlation
coefficient. PE is used in interpretation whether the calculated value of r is significant or not. If r
< P.E., it is insignificant i.e. there is no evidence of correlation. If r> 6 P.E., it is significant. In
above table, correlation coefficient between EPS and MVPS of SCBNL is -0.3628 which is less than
PE. So, correlation coefficient of EPS and MVPS is insignificant. Other two banks' correlation
coefficient between EPS and MVPS is significant.

4.2.3 Correlation between D/P ratio and MVPS

Table 15
Name of Bank Correlation Relatioship Correlation Probable Error Significant/
coefficient (r) between Determinant (PE) Insignificant
variables (r²)
SCBNL 0.5321 positive 0.2831 0.2158 Significant
HBL 0.7300 positive 0.5362 0.1396 Significant
EBL 0.8840 positive 0.7814 0.0658 Significant
Source : Appendix 2

Table 15 shows the relationship between D/P ratio and MVPS of three sample banks. It is observed
that correlation coefficient(r) between D/P ratio and MVPS of sample banks is positive. All banks
correlation coefficient is more than 0.50 which indicates that D/P ratio and MVPS of banks are
correlated.

The coefficient of determinant is more precise measure of strenth of the relationship between two
variables and trends itself to more precise interpretation because it can be presented as a portion or
as a percentage. The coefficient determinant between D/P ratio and MVPS of SCBNL is 0.2831,
which means that the D/P ratio determines 28.31% of variation in MVPS. In same way, D/P ratio
determines 53.62 % and 78.14% variation in MVPS of HBL and EBL respectively.

The Probable Error (PE) is used to measure the reability and test of significance of correlation
coefficient. PE is used in interpretation whether the calculated value of r is significant or not. If r
< P.E., it is insignificant i.e. there is no evidence of correlation. If r> 6 P.E., it is significant. In
above table, correlation coefficient between D/P ratio and MVPS of all banks is more than 6 PE.
So, correlation coefficient of D/P ratio and MVPS is significant.

4.2.4 Correlation between MVPS and last year's dividend ( ) of related banks.
Table 16
Name of Bank Correlation Relatioship Correlation Probable Error Significant/
coefficient (r) between Determinant (PE) Insignificant
variables (r²)
SCBNL 0.8734 Positive 0.7629 0.0713 Significant
HBL 0.8611 Positive 0.7415 0.0778 Significant
EBL 0.7262 Positive 0.5273 0.1423 Significant
Source : Appendix 4
Table 16 shows the relationship between last year dividend and MVPS of three sample banks. It is
observed that correlation coefficient(r) between last year dividend and MVPS of sample banks is
positive. All banks correlation coefficient is more than 0.50 which indicates that last year divided and
MVPS of banks are correlated.

The coefficient of determinant is more precise measure of strenth of the relationship between two
variables and trends itself to more precise interpretation because it can be presented as a portion or
as a percentage. The coefficient determinant between last year dividend and MVPS of SCBNL is
0.7629, which means that the last year dividend determines 76.29% of variation in MVPS. In same
way, last year dividend determines 74.15% and 52.73% variation in MVPS of HBL and EBL
respectively.
The Probable Error (PE) is used to measure the reability and test of significance of correlation
coefficient. PE is used in interpretation whether the calculated value of r is significant or not. If r
< P.E., it is insignificant i.e. there is no evidence of correlation. If r> 6 P.E., it is significant. In
above table, correlation coefficient between last year dividend and MVPS of all banks is more than 6
PE. So, correlation coefficient of last year dividend and MVPS is significant.
4.3. Regression Analysis
The regression is used to determine the statistical relationship between two or more variable and to
make predicates of one variable on the basis of the others. The regression can analyse either is
simple regression or multiple regressions. When we take only one independent variable and predict
the value of he dependent variable through the appropriate regression line the analysis is know
simple regression analysis. If the analysis is performed by the use of two or more independent
variable is known as multiple regression analysis. The availability of the data has been taken for the
five years.

4.3.1 Dependent Variable Market Value per Share (MVPS) is Earning per Share (EPS)

Y= a+ bX
Where,
Y = market value per share (MVPS)
a = Regression constant
b = Regression coefficient
X = Earning per share (EPS)
Table 17
Simple Regression equation of MVPS on EPS

Banks Constant Regression r r2 t-value

(a) Coefficient (Calculated)
(b)
SCBNL 8637.80 -25.16 -0.3628 0.1316 0.6743
HBL -2196.50 63.19 0.8298 0.6886 2.5756
EBL -1228.33 42.37 0.8915 0.7947 3.4070
Source : Appendix 1

Above table describes the major output of simple regression analysis between earning per share
(EPS) independent variable and market value per share (MVPS) dependent variables of the
concerned banks. As for the regression EPS and MVPS in concerned with regression coefficient
(beta coefficient) of the SCBNL is -25.16, which indicate that one rupees change in EPS leads to
decrease in market price of Rs.25.16 holding other variable constant. The correlation coefficient
between these two variables of SCBNL is also negative.

The beta coefficient of HBL is 63.19, which indicates that one rupees increase in EPS leads to
average of Rs.63.19 increase in market price. Similarly the beta coefficient of EBL is 42.37, which
indicates that one rupees increase in EPS leads to average about Rs.42.37 increase in MVPS
respectively.

Coefficient of determinations (r2) of SCBNL, HBL & EBL are 0.1316, 0.6886 and 0.7947
respectively. This indicates that 13.16%, 68.86% & 79.47% MVPS variation are explained by
variation in EPS.
Since the calculated 't' value of SCBNL is 0.6743 which is lower than tabulated value of 't' i.e. 2.132
at 5% level of significance. So, the result is statistically insignificant at 5% level of significance.
Hence, the calculated value of 't' of other two banks are 2.5756 and 3.4070 which are higher than the
tabulated value of 't' ( i.e. 2.132) at 5% level of significance. So, the result of HBL and EBL is
statistically significant at 5% level of significance.

4.3.2 Dependent Variable Market Value per Share (MVPS) or last year Dividend per Share
( )

Y= a + bX
Where,
Y = Market value per share
a = Regression constant
b = Regression coefficient
X = Last year Dividend per share
 Table 18
Simple Regression equation of MVPS on
Banks Constant Regression r r2 t-value
(a) Coefficient (Calculated)
(b)
SCBNL -12907.90 141.09 0.8734 0.7629 3.1067
HBL 61.11 41.93 0.8611 0.7415 2.9335
EBL 524.12 49.32 0.7262 0.5273 1.8293
Source : Appendix 4
Above table describes the major output of simple regression analysis between last year dividend per
share, the independent variable and market value per share (MVPS) dependent variables of the
concerned banks. As for the regression last year dividend per share and MVPS in concerned with
regression coefficient (beta coefficient) is positive which indicates the positive correlation is exist
between variables. This indicates that one rupees increase in dividend causes Rs. 141.09, Rs. 41.93
and Rs. 49.32 increase in the price of stock of SCBNL, HBL and EBL respectively holding other
variable constant.
Coefficient of determinations (r2) of SCBNL, HBL & EBL are 0.7629, 0.7415 and 0.5273
respectively. This indicates that 76.29%, 74.15% and 52.73% MVPS variation are explained by
variation in last year dividend per share.

Since the calculated 't' value of SCBNL, HBL and EBL is 3.1067, 2.9335 and 1.8293 respectively.
Among them, calculated t value of SCBNL and HBL is higher than tabulated value of 't' i.e. 2.132 at
5% level of significance. So, the result of these two banks is statistically significant at 5% level of
significance. Hence, calculated t value of EBL is lower than tabulated value of 't' i.e. 2.132 at 5%
level of significance. So, the result of this bank is statistically insignificant at 5% level of significance.
4.3.3 Dependent Variable Dividend per Share (DPS) on Earning per Share (EPS)
Y= a + bX
Where,
Y = Dividend per share
a = Regression constant
b = Regression coefficient
X = Earning per Share
 Table 19
Simple Regression equation of DPS on EPS
Banks Constant Regression r r2 t-value
(a) Coefficient (Calculated)
(b)
SCBNL 52.67 0.490 0.8624 0.7437 2.9508
HBL -8.24 0.808 0.8630 0.7447 2.9586
EBL -28.37 0.870 0.9990 0.9935 0.0806
Source : Appendix 3
Above table describes the major output of simple regression analysis between earning per share, the
independent variable and dividend per share (DPS) dependent variables of the concerned banks. As
for the regression EPS and DPS in concerned with regression coefficient (beta coefficient) is
positive which indicates the positive correlation is exist between variables. This indicates that one
rupees increase in EPS causes Rs. 0.490, Rs. 0.808 and Rs. 0.870 increase in the DPS of SCBNL,
HBL and EBL respectively holding other variables constant.

Coefficient of determinations (r2) of SCBNL, HBL & EBL are 0.7437, 0.7447 and 0.9935
respectively. This indicates that 74.37%, 74.47% and 99.35% DPS variation are explained by
variation in EPS.
Since the calculated 't' value of SCBNL, HBL and EBL is 2.9508,2.9586 and 0.0806 respectively.
Among them, calculated t value of SCBNL and HBL is higher than tabulated value of 't' i.e. 2.132 at
5% level of significance. So, the result of these two banks is statistically significant at 5% level of
significance. Hence, calculated t value of EBL is lower than tabulated value of 't' at 5% level of
significance. So, the result of this bank is statistically insignificant at 5% level of significance.
4.4 Test of Hypothesis
Hypothesis is usually considered as the principal instrument in research. It can also be
considered as suggested solution of the research problems. Its main function is to suggest new
experiments and observations. With the available data decision-makers applied the hypothesis
testing and give the decision accordingly.
In this study, null and alternative hypothesis have been formulated to test whether the defference
between DPS and EPS of sample banks are statistically significant or not with using 5% level of
significance.
4.4.1 First Hypothesis
Null Hypothesis (H0) : µ1 = µ2 = µ3
There is no significant different in DPS on sample commercial banks.
Alternative hypothesis (H1): µ1 ≠ µ2 ≠µ3
There is significant difference in DPS on sample commercial banks.
Table 20
Dividend per share (total)
Year SCBNL HBL EBL
2004/05 120.00 31.58 20.00
2005/06 140.00 35.00 25.00
2006/07 130.00 40.00 40.00
2007/08 130.00 45.00 50.00
2008/09 100.00 43.56 60.00
Computation
of Test Statistics 'F'.
Correction Factor (CF) = 68,025.52
Total Sum of Squares (TSS) = 26,244.24
Sum of Squares between Samples (SSC) = 24,075.40
Sum of Squares within Samples (SSW) = TSS – SSC = 2168.84
Table no.21
ANOVA Table
Sources of Sum of Degree of Mean Sum of Squares F ratio
Variations Squares Freedom
Between Banks 24,075.40 3-1=2
MSB = = 12,037.70 F=
(SSC)
=66.60
Within Banks 2,168.84 15-3 =12
(SSW) MSW = = 180.74

Total (TSS) 26,244.24 15-1= 14

Source : Appendix5

Degree of freedom = (k-1) and (N- k) = 3-1 and 15-3 = 2 and 12.
Critical Value: The tabulated value of F at 5% level of significane for 2 and 12 d.f. is 3.89.
Decision: Since the calculated value of F (66.60) is greater than the tabulated value of F, the
null hypothesis is rejected. Therefore, we can conclude that there is significant difference in
DPS of sample banks at 5% level of significance.

4.4.2 Second Hypothesis

Null Hypothesis (H0) : µ1 = µ2 = µ3
There is not significant difference in EPS on sample commercial banks.
Alternative Hypothesis (H1) µ1 ≠ µ2 ≠µ3
There is significant difference in EPS on sample commercial banks.

Table 22
Earning Per Share (In Rs.)

Year SCBNL HBL EBL

2004/05 143.14 47.91 54.22
2005/06 175.84 59.24 62.78
2006/07 167.47 60.66 78.42
2007/08 131.92 62.74 91.82
2008/09 109.99 61.90 99.99

Computation of Test Statistics 'F'.

Correction Factor (CF) = 132,171.77
Total Sum of Squares (TSS) = 25,495.89
Sum of Squares between Samples (SSC) = 21,024.70
Sum of Squares within Samples (SSW) = TSS- SSC = 4,471.19
 Table no.23
ANOVA Table
Sources of Sum of Degree of Mean Sum of Squares F ratio
Variations Squares Freedom
Between Banks 21,024.70 3-1=2
MSB = = 10512.35 F= =
(SSC)
28.21
Within Banks 4,471.19 15-3 =12
(SSW) MSW = = 372.60

Total (TSS) 25,495.89 15-1= 14

Source : Appendix6
Degree of freedom = (k-1) and (N- k) = 3-1 and 15-3 = 2 and 12.
Critical Value: The tabulated value of F at 5% level of significane for 2 and 12 d.f. is 3.89.
Decision: Since the calculated value of F (28.21) is greater than the tabulated value of F, the
null hypothesis is rejected. Therefore, we can conclude that there is significant difference in
EPS of sample banks at 5% level of significance.

4.5 Major Findings

1. DPS (cash) of SCBNL is highest in analysis period with average of Rs. 92.00 per share.
Hence, the DPS of HBL and EBL is lower than SCBNL with average of Rs. 18.72 and Rs.
17.00 per share. Cash dividend of SCBNL is in decreasing trend and oher two banks trend is
fluctuted.
2. After stastical analysis of DPS, it is found that C.V of SCBNL is 35.56% which is lowest and
EBL is 70.83% that is highest among sample banks. This shows that DPS of SCBNL is
more consistent and stable than other two banks. In same way, DPS of EBL is less
consistent and less stable than others.
3. EPS of SCBNL is higher than other selected banks HBL ansd EBL. EPS always shows the
performance of banks. So, it is concluded that the performance of SCBNL is better than
other two banks.
4. After statistical anlysis of EPS, CV of HBL is lowest among three banks i.e. 10.36% and
EBL is highest i.e. 24.76%. This shows that EPS of HBL is more consistent and stable than
other two banks. In same way, EPS of EBL is less stable than other two banks.
5. All sample banks has increased or decresed the dividend per share every year as per
increased or decreased of earning per share. The percentage of changing in EPS and DPS is
consequent.
6. Average dividend pay out ratio of SCBNL, HBL and EBL in analysis period is 86.12%,
66.60% and 48.43% respectively. The CV of dividend payout ratio of HBL is lowest and
EBL is highest. This analysis indicates that SCBNL has distributed more amounts of
earnings to its shareholders and EBL has distributed the lowest among sample banks. But
dividend payout raio of HBL is most consistent among sample companies.
7. Dividend yeild ratio of sample banks is not more than 6% in analysis period. Dividend yeild
ratio of SCBNL is decreased every year with higher increment of market price than earning
and dividend per share even though average DYR ratio is highest among sample banks. But
DYR of other banks are not so highly fluctuated and in same level.
8. The sample banks have distributed the cash dividend and stock dividend jointly in analysis
period. All sample banks have distributed higher percent of cash dividend in early years and
gradually decrease in later years. In same way, these banks have increased the stock dividend
in later years.
9. The correlation coefficient between EPS and DPS is positive for all three sample banks in
analysis period. This indicates the EPS and DPS are correlated. The coefficient determinant
is more than 70% of all three banks in analysis period. This indicates that more than 70%
stock variation is explained by variation in EPS. The correlation coefficient between EPS
and DPS of sample banks is significant because the value of r of sample banks is greater than
6 PE.
10. The correlation coefficient between EPS and MVPS is negative for SCBNL and coefficient
determinant is 13.16%. This indicates the EPS and MVPS are negatively correlated. The
value of r is less than PE. So, it is said that the correlation coefficient between EPS and
MVPS of SCBNL is insignificant. Hence, the cirrelation coefficient between EPS and MVPS
is positive for HBL and EBL in analysis period. This indicates the EPS and MVPS correlated
for these banks. The coefficient determinant is more than 60% of these two banks in
 analysis period. The correlation coefficient between EPS and DPS of HBL and EBL is
significant.
11. D/P ratio and MVPS of sample three banks are positively correlated and relatioship
between two variables is also significant.
12. The correlation coefficient between MVPS and last year DPS is positive for all three sample
banks in analysis period. This indicates the MVPS and last year DPS are correlated. The
coefficient determinants are 0.7629, 0.7415 and 0.5273 for three banks in analysis period.
This indicates that 76.29%, 74.15% and 52.73% stock variation is explained by variation in
last year DPS for three banks respectively. The correlation coefficient between MVPS and
last year DPS of sample banks is significant because the value of r of sample banks is greater
than 6 PE.
13. The regression coefficient (b) of MVPS(dependend variable) on EPS(independend variable)
of SCBNL is -25.16, HBL is 63.19 and EBL is 42.37. This indicates one rupee change in
EPS leads Rs. -25.16, 63.19 and 42.37 changes in MVPS of concerned banks respectively.
14. Calculated t value of MVPS and EPS of SCBNL is 0.6743 which is lower than tabulated
value of t i.e. 2.132 at 5% level of significance. It means the result is insignificant at 5% level
of significance. Hence, the calculated value of 't' of other two banks MVPS and EPS are
2.5756 and 3.4070 respectively which are higher than the tabulated value of 't' ( i.e. 2.132) at
5% level of significance. So, the result of HBL and EBL is statistically significant at 5% level
of significance.
15. The regression coefficient (b) of MVPS (dependend variable) on last year DPS (independend
variable) of sample banks are 141.09, 41.93 and 49.32. This indicates one rupee change in
last year DPS leads Rs. 14.09, 41.93 and 49.32 changes in MVPS of concerned banks
respectively.
16. Calculated t valueof MVPS and last year DPS of SCBNL, HBL and EBL is 3.1067, 2.9335
and 1.8293 respectively. Among them, calculated t value of SCBNL and HBL is higher than
tabulated value of 't' i.e. 2.132 at 5% level of significance. So, the result of these two banks is
statistically significant at 5% level of significance. Hence, calculated t value of EBL is lower
than tabulated value of 't' at 5% level of significance. So, the result of this bank is statistically
insignificant at 5% level of significance.
17. The regression coefficients (b) of DPS (dependend variable) on EPS (independend variable)
of sample banks are 0.490, 0.808 and 0.870. This indicates one rupee change in EPS leads
Rs.0.490, 0.808 and 0.870 changes in DPS of concerned banks respectively.
18. Calculated t valueof DPS and EPS of SCBNL, HBL and EBL is 2.9508, 2.9586 and 0.0806
respectively. Among them, calculated t value of SCBNL and HBL is higher than tabulated
value of 't' i.e. 2.132 at 5% level of significance. So, the result of these two banks is
statistically significant at 5% level of significance. Hence, calculated t value of EBL is lower
than tabulated value of 't' at 5% level of significance. So, the result of this bank is statistically
insignificant at 5% level of significance.
19. In first hypothesis test, the calculated value of F (66.60) is less than tabulated value of F
i.e. 3.89 at 5% level of significance for 2 and 12 d. f., the null hypothesis is rejected.
Therefore, we can conclude that there is significant difference in DPS of sample banks at
5% level of significance.
20. In second hypothesis test, calculated value of F (28.21) is less than tabulated value of F
i.e. 3.89 at 5% level of significance for 2 and 12 d. f., the null hypothesis is rejected.
Therefore, we can coclude that there is no significant difference in EPS of sample banks
at 5% level of significance.
 CHAPTER-V
SUMMARY, CONCLUSION AND RECOMMENDATIONS
In this chapter, the summary of the study with conclusions and recommendations on the basis of
analysis of data and findings of study have been presented.
5.1 Summary
The shareholders have invested their money as capital in company to earn return. Dividend is
income or return that the shareholders received physically from the company. Dividend refers to
the portion of net earning which is paid out to shareholders. In other words, dividend is the
earning or profit distributed to shareholders by a company. It may be in cash, shares and
securities or a combination of these. Dividend decision is the major financial decision of
management because firm has to choose one alternative between distributing earnings to its
shareholders or retained the earning for reinvesting in the firm.
Generally, dividend is known as the physical return of investment. In this sense dividend is
normally paid in cash to the shareholders.When the company is incapable to pay dividend in
cash, different forms of dividend payment models are used to satisfy its shareholders. The
different types of dividend such as cash dividend, stock dividend, bond dividend, scrip dividend,
property dividend, stock split, reverse stock split and stock repurchase are discussed in this
study. In same way, different types of dividend policies like stable dividend polcy, regular plus
extra dividend policy, irregular dividend policy, fixed dividend per share policy, mixed policy
etc are briefly discussed in this study.
Dividend policy of firm may be affected by different factors such as earning, liquidity position,
networth, investing opportunities, expectation of shareholders and policies followed by other
companies, legal provision of nation etc. Considering all these factors, management has to take
the appropriate dividend policy to satisfy existing shareholders with maintaining financial
soundness of company.
The main objectives of the study is to study the major dividend policies and practices followed
by Nepalese joint venture banks and examine the relationship between earnings, dividends,
retained earnings and market price of stocks, dividend payout ratio, dividend yield and liquidity
ratio. Because of various limitations only three joint venture banks are selected as sample for this
study.
This study is mainly based on secondary data of selected three joint venture commercial banks.
The source of data is the annual reports published by related banks in different fiscal year and
data available at site of Nepal Stock Exchange.
Many financial and statistical tools are used to find out appropriate relationship between
dividend and other financial variables of banks which helps to make the study reliable and
realistic. The relationship between variables is statistically tested at 5% level of significance.
This study has been organised into five major parts. The brief introduction, objectives,
limitations of study has been mentioned in first chapter. The available related litratures have
been reviewed in second chapter. In same way, research methodology is described in third
chapter. All available data are presented and analysis with using different financial and statistical
tools and summarize the findings of analysis in chapter four. In this final chapter, an attempt has
made to present summary, conclusions and recommendations.
5.2 Conclusion
From the analysis of various financial indicators and statistical tools of sample banks, following
facts can be concluded:
• Above mentioned major findings led this study concludes that the earning of banks
are satisfactory in Nepalese context. Among sample banks, SCBNL is in leading
position in terms of earning and DPS followed by EBL and HBL in analysis period.
• It is found that there is no consistecy in dividend distribution in sample banks. The
research shows that these companies have no defined policy regarding distribution of
the dividend payments. However these all companies have distributed certain amount
of cash dividend and certain percent of stock dividend in analysis period. Among
sample bnaks, SCBNL has paid the higher dividend than other banks in analysis
period.
• Average price earning ratio of sample banks seems more than 25 times and dividend
yeild ratio is less than 3% in average. This indicates that the market price of share
seems high considering its earning and dividend payment.
• It is found that there is negative and insignificant relationship between earning and
market value of SCBNL. This indicates that the price of this company's share is
affected by other factors than earning. But other companies' earning and market price
of share is positively correlated and relationship between these variables is
 significant. Though there is positive and significant relationship between market
value per share and last year's dividend.
• From this study, it has been found that the market price of stock is affected by other
variables than earnings which indicate the rational behaviour of investors.
• The EPS and DPS of sample banks are highly correlated. It means the dividend per
share of company is increased when the earning of banks is increased.
• There is significance difference in EPS and DPS of sample banks in analysis period.
• At last, this study examines and analyses the dividend policy and practices of three
joint venture commercial banks for the period of five years from 2004/05 to 2008/09
due to the limitation of time and other constraint.
5.3 Recommendations
Based on major findings and conclusion drawn, some recommendations are provided below,
hoping that these will be helpfull to overcome the issues in dividend practices in Nepal.
• The bank should consider the existing conditions and expectations of shareholders while
distribiting dividends so that distributed dividend should meet the expectation of the
shareholders as far as possible.
• The capital market of Nepal is going down day by day in this time. So, most of the
investors are expecting a quick return on their investment rather than long term return.
They prefer dividend in form of cash rather than stock. So, cash dividend should be
distributed to satisfy the existing stockholders of company.
• Nepalese commercial banks have not followed any specific dividend policy till now.
BOD has decided to distribute the dividend in any form. This dividend should be
accepted by other shareholders. Nepalese commercial banks are not applying specific
dividend policy like stable dividend, constant pay out, low regular and extra policy etc.
So, there is uncertainty in dividend distribution to general shareholders. To reduce that
uncertainty and maintain certain level of MVPS, companies should have declared the
particular dividend policy and dividend pay out policy for short term and long term.
• In Nepalese context, there are only two forms of dividend used in practice i.e. stock
dividend and cash dividend. Shareholders have to accept their offer without any
hesitation. If shareholder wants to take another form of dividend instead of offered
dividend, at this moment comapany has to provide the opportunity to choose the
 alternatives. There are other forms of dividend like bond dividend, property dividend,
script dividend etc. These forms of dividend can be proposed to the shareholders in
annual general meeting for approval, if possible.
• In this study, SCBNL has the highest average dividend yeild ratio in analysis period i.e.
2.91%. This indicates that one shareholder who has purchased the share from market can
get only 2.91% return of his investment. But the interest rate of deposits is more than 5%
at present in our market. This situation has demotivated the new investors to enter in
financial market. So, companies have to increase their performance and have to increase
the amount of dividend to maintain the market price of share and not redice the worth of
existing shareholders.
• There is lack of rules binding companies to pay dividend. The legal rules for the
treatment of dividend are most for the smooth growth of national economy. Some
regulating acts are silent on these matters most of the companies are paying dividend less
than interest rate paid by commercial banks. In this situation, it is necessary to enact legal
rules that bind companies to pay dividend and that regulates and market self- functioning
to the stock market for this purpose. GON, NEPSE, SEBON and other concerned parties
should do work together.
• The directors and managers of companies are selected or appointed to do the work on
behalf of shareholders. They should develop certain programs to impove efficiency and
reduce the government and concerned authorities' interference in daily operation. So,
managers and directors has to fulfilled their duties and responsiblities to protect and
fullfil the shareholders' interest. They should not operate the organisation on the desired
of themselves.
• It is recommended that optimum dividend policy should be prepare by company based on
following criteria which help to increase the networth of company, grab the investment
opportunity and satisfy the existing shareholders.
a. The optimum retention policy should be prepared for expansion and mordernization of
company.
b. The optimum dividend policy should be prepared that will help to increase the market value
per share. Then net present value of shareholders weath can be maximized and prospecting
investors are attracted to invest in company.
c. The company should adopt the stable or consistency in dividend payment.
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www. sebonp.com
 APPENDIX 1
Calculation of Correlation coefficient, coefficient determinants, P.E., regression coefficient, regression constant and t
values between EPS and MVPS

Standard Chartered Bank

Year EPS(X) MVPS(Y) XY X2 Y2
2004/05 143.14 2345 335663.30 20489.06 5499025
2005/06 175.84 3775 663796.00 30919.71 14250625
2006/07 167.47 5900 988073.00 28046.2 34810000
2007/08 131.92 6830 901013.60 17402.89 46648900
2008/09 109.99 6010 661039.90 12097.8 36120100
Total 728.36 24860 3549585.80 108955.65 137328650

nΣXY − ΣXΣY
Correlation coefficient, r =
nΣX − (ΣX ) 2 − nΣY 2 − (ΣY ) 2
2

5 × 3549585.80 − 728.36 × 24860

r= = - 0.3628
5 × 108955.65 − (728.36) 2 − 5 × 137328650 − (24860) 2

Coefficient Determinants, r² = (-0.3628)² = 0.1316.

1− r2 1 − 0.1316
Probable Error, P.E. = 0.6745 × = 0.6745 × = 0.2614
n 5

n ∑ XY − ∑ X ∑ Y
Regression coefficient, b=
n ∑ X 2 − (∑ X ) 2
5 × 3549585.80 − 728.36 × 24860
= = -25.16
5 × 108955.65 − (728.36) 2

∑Y − b ∑ X 24860 − (−25.16) × 728.36

Regression constant, a = = = 8637.80
n 5

r× n−2 − 0.3628 × 5 − 2
t - value, t = = = 0.6748
1− r2 1 − (−0.3628) 2
 Himalayan Bank Limited
Year EPS(X) MVPS(Y) XY X2 Y2
2004/05 47.91 920 44077.20 2295.368 846400
2005/06 59.24 1100 65164.00 3509.378 1210000
2006/07 60.66 1740 105548.40 3679.636 3027600
2007/08 62.74 1980 124225.20 3936.308 3920400
2008/09 61.9 1760 108944.00 3831.61 3097600
Total 292.45 7500 447958.80 17252.30 12102000

nΣXY − ΣXΣY
Correlation coefficient r =
nΣX 2 − (ΣX ) 2 − nΣY 2 − (ΣY ) 2

5 × 447958.80 − 292.45 × 7500

r= = 0.8298
5 × 17252.30 − (292.45) 2 − 5 × 12102000 − (7500) 2

Coefficient Determinants r² = (0.8298)² = 0.6886.

1− r2 1 − 0.6886
Probable Error P.E. = 0.6745 × = 0.6745 × = 0.0937
n 5
n ∑ XY − ∑ X ∑ Y
Regression coefficient, b=
n ∑ X 2 − (∑ X ) 2
5 × 447958.80 − 292.45 × 7500
= = 63.19
5 × 17252.30 − (292.45) 2

∑Y − b ∑ X 7500 − 63.19 × 292.45

Regression constant, a = = = -2196.50
n 5

r× n−2 0.8298 × 5 − 2
t - value, t = = = 2.5756
1− r2 1 − 0.8298) 2
 Everest Bank Limited

Year EPS(X) MVPS(Y) XY X2 Y2

2004/05 54.22 870 47171.40 2939.808 756900
2005/06 62.78 1379 86573.62 3941.328 1901641
2006/07 78.42 2430 190560.60 6149.696 5904900
2007/08 91.82 3132 287580.24 8430.912 9809424
2008/09 99.99 2455 245475.45 9998 6027025
Total 387.23 10266 857361.31 31459.75 24399890
nΣXY − ΣXΣY
Correlation coefficient r =
nΣ X − ( Σ X ) 2 − n Σ Y 2 − ( Σ Y ) 2
2

5 × 857361.31 − 387.23 × 10266

r= = 0.8915
5 × 31459.75 − (387.23) 2 − 5 × 24399890 − (10266) 2

Coefficient of Determinants r² = (0.8915)² = 0.7947.

1− r2 1 − 0.7947
Probable Error P.E. = 0.6745 × = 0.6745 × = 0.0618
n 5

n ∑ XY − ∑ X ∑ Y
Regression coefficient, b=
n ∑ X 2 − (∑ X ) 2

5 × 857361.31 − 387.23 × 10266

= = 42.37
5 × 31459.75 − (387.23) 2

∑Y − b ∑ X 10266 − 42.37 × 387.23

Regression constant, a = = = -1228.33
n 5

r× n−2 0.8915 × 5 − 2
t - value, t = = = 3.4070
1− r2 1 − 0.8915) 2
 APPENDIX 2

Calculation of Correlation coefficient, coefficient determinants and P.E. between DPR and MVPS

Standard Chartered Bank

Year DPR(X) MVPS(Y) XY X2 Y2
2004/05 83.83 2345 196581.35 7027.469 5499025
2005/06 79.63 3775 300603.25 6340.937 14250625
2006/07 77.63 5900 458017.00 6026.417 34810000
2007/08 98.54 6830 673028.20 9710.132 46648900
2008/09 90.91 6010 546369.10 8264.628 36120100
Total 430.54 24860 2174598.90 37369.58 137328650

nΣXY − ΣXΣY
Correlation coefficient r =
nΣ X 2 − ( Σ X ) 2 − n Σ Y 2 − ( Σ Y ) 2

5 × 2174598.90 − 430.54 × 24860

r= = 0.5321
5 × 37369.58 − (430.54) 2 − 5 × 137328650 − (24860) 2

Coefficient of Determinants r² = (0.5321)² = 0.2831.

1− r2 1 − 0.2831
Probable Error P.E. = 0.6745 × = 0.6745 × = 0.2158
n 5
 Himalayan Bank Ltd.

Year DPR(X) MVPS(Y) XY X2 Y2

2004/05 65.91 920 60637.20 4344.128 846400
2005/06 59.08 1100 64988.00 3490.446 1210000
2006/07 65.94 1740 114735.60 4348.084 3027600
2007/08 71.72 1980 142005.60 5143.758 3920400
2008/09 70.37 1760 123851.20 4951.937 3097600
Total 333.02 7500 506217.60 22278.35 12102000

nΣXY − ΣXΣY
Correlation coefficient r =
nΣ X 2 − ( Σ X ) 2 − n Σ Y 2 − ( Σ Y ) 2

5 × 506217.60 − 333.02 × 7500

r= = 0.7322
5 × 22278.35 − (333.02) 2 − 5 × 12102000 − (7500) 2

Coefficient of Determinants r² = (0.7322)² = 0.5362.

1− r2 1 − 0.5362
Probable Error P.E. = 0.6745 × = 0.6745 × = 0.1396
n 5
 Everest Bank Ltd.

Year DPR(X) MVPS(Y) XY X2 Y2

2004/05 36.88 870 32085.60 1360.134 756900
2005/06 39.82 1379 54911.78 1585.632 1901641
2006/07 51 2430 123930.00 2601 5904900
2007/08 54.45 3132 170537.40 2964.803 9809424
2008/09 60 2455 147300.00 3600 6027025
Total 242.15 10266 528764.78 12111.57 24399890

nΣXY − ΣXΣY
Correlation coefficient r =
nΣ X 2 − ( Σ X ) 2 − n Σ Y 2 − ( Σ Y ) 2

5 × 528764.78 − 242.15 × 10266

r= = 0.8840
5 × 12111.57 − (242.15) 2 − 5 × 24399890 − (10266) 2

Coefficient of Determinants r² = (0.8840)² = 0.7814.

1− r2 1 − 0.7814
Probable Error P.E. = 0.6745 × = 0.6745 × = 0.0658
n 5
 APPENDIX 3

Calculation of Correlation coefficient, coefficient determinants, P.E., regression coefficient, regression

constant and t values between EPS and DPS

Standard Chartered Bank

Year EPS(X) DPS(Y) XY X2 Y2
2004/05 143.14 120 17176.80 20489.06 14400
2005/06 175.84 140 24617.60 30919.71 19600
2006/07 167.47 130 21771.10 28046.2 16900
2007/08 131.92 130 17149.60 17402.89 16900
2008/09 109.99 100 10999.00 12097.8 10000
Total 728.36 620 91714.10 108955.65 77800

nΣXY − ΣXΣY
Correlation Coefficient, r =
nΣ X 2 − ( Σ X ) 2 − nΣ Y 2 − ( Σ Y ) 2

5 × 91714.10 − 728.36 × 620

r= = 0.8624
5 × 108955.65 − (728.36) 2 − 5 × 77800 − (620) 2

Coefficient of Determinants, r² = (0.8624)² = 0.7437

1− r2 1 − 0.7437
Probable Error, P.E. = 0.6745 × = 0.6745 × = 0.0771
n 5

n ∑ XY − ∑ X ∑ Y
Regression coefficient, b=
n ∑ X 2 − (∑ X ) 2
5 × 91714.10 − 728.36 × 620
= = 0.490
5 × 108955.65 − (728.36) 2
∑Y − b ∑ X 620 − 0.490 × 728.36
Regression constant, a = = = 52.67
n 5

r× n−2 0.8624 × 5 − 2
t - value, t = = = 2.9508
1− r2 1 − (0.8624) 2
 Himalayan Bank Limited
Year EPS(X) DPS(Y) XY X2 Y2
2004/05 47.91 31.58 1513.00 2295.368 997.2964
2005/06 59.24 35 2073.40 3509.378 1225
2006/07 60.66 40 2426.40 3679.636 1600
2007/08 62.74 45 2823.30 3936.308 2025
2008/09 61.9 43.56 2696.36 3831.61 1897.4736
Total 292.45 195.14 11532.46 17252.30 7744.77

nΣXY − ΣXΣY
Correlation Coefficient, r =
nΣX 2 − (ΣX ) 2 − nΣY 2 − (ΣY ) 2

5 × 17252.30 − 292.45 × 195.14

r= = 0.8630
5 × 17252.30 − (292.45) 2 − 5 × 7744.77 − (195.14) 2

Coefficient of Determinants, r² = (0.8630)² = 0.7447

1− r2 1 − 0.7447
Probable Error, P.E. = 0.6745 × = 0.6745 × = 0.0768
n 5
n ∑ XY − ∑ X ∑ Y
Regression coefficient, b =
n ∑ X 2 − (∑ X ) 2

5 × 17252.30 − 292.45 × 195.14

= = 0.808
5 × 17252.30 − (292.45) 2

∑Y − b ∑ X 195.14 − 0.808 × 292.45

Regression constant, a = = = -8.24
n 5

r× n−2 0.8630 × 5 − 2
t - value, t = = = 2.9586
1− r2 1 − (0.8630) 2
 Everest Bank Limited

Year EPS(X) DPS(Y) XY X2 Y2

2004/05 54.22 20 1084.40 2939.808 400
2005/06 62.78 25 1569.50 3941.328 625
2006/07 78.42 40 3136.80 6149.696 1600
2007/08 91.82 50 4591.00 8430.912 2500
2008/09 99.99 60 5999.40 9998 3600
Total 387.23 195 16381.10 31459.75 8725

nΣXY − ΣXΣY
Correlation Coefficient, r =
nΣX − (ΣX ) 2 − nΣY 2 − (ΣY ) 2
2

5 × 16381.10 − 387.23 × 195

r= = 0.9990
5 × 31459.75 − (387.23) 2 − 5 × 8725 − (195) 2

Coefficient of Determinants, r² = (0.9990)² = 0.9935

1− r2 1 − 0.9935
Probable Error, P.E. = 0.6745 × = 0.6745 × = 0.0806
n 5
 APPENDIX 4

Calculation of Correlation coefficient, coefficient determinants, P.E., regression coefficient, regression

constant and t values between MVPS(Y) and Last year DPS (X).
Himalayan Bank Limited
Year DPS(X) MVPS(Y) XY X2 Y2
2004/05 20 920 18400.00 400 846400
2005/06 31.58 1100 34738.00 997.2964 1210000
2006/07 35 1740 60900.00 1225 3027600
2007/08 40 1980 79200.00 1600 3920400
2008/09 45 1760 79200.00 2025 3097600
Total 171.58 7500 272438.00 6247.30 12102000

nΣXY − ΣXΣY
Correlation Coefficient, r =
nΣX 2 − (ΣX ) 2 − nΣY 2 − (ΣY ) 2

5 × 272438.00 − 171.58 × 7500

r= = 0.8611
5 × 6247.30 − (171.58) 2 − 5 × 12102000 − (7500) 2
Coefficient of Determinants, r² = (0.8611)² = 0.7415
1− r2 1 − 0.7415
Probable Error, P.E. = 0.6745 × = 0.6745 × = 0.0778
n 5
n ∑ XY − ∑ X ∑ Y
Regression coefficient, b=
n ∑ X 2 − (∑ X ) 2
5 × 272438.00 − 171.58 × 7500
= = 41.93
5 × 6247.30 − (171.58) 2

∑Y − b ∑ X 7500 − 41.93 × 171.58

Regression constant, a = = = 61.11
n 5

r× n−2 0.8611 × 5 − 2
t - value, t = = = 2.9335
1− r2 1 − (0.8611) 2
 Standard Chartered Bank
Year DPS(X) MVPS(Y) XY X2 Y2
2004/05 110 2345 257950.00 12100 5499025
2005/06 120 3775 453000.00 14400 14250625
2006/07 140 5900 826000.00 19600 34810000
2007/08 130 6830 887900.00 16900 46648900
2008/09 130 6010 781300.00 16900 36120100
Total 630 24860 3206150.00 79900.00 137328650

nΣXY − ΣXΣY
Correlation Coefficient, r =
nΣX 2 − (ΣX ) 2 − nΣY 2 − (ΣY ) 2

5 × 3206150.00 − 630.00 × 24860.00

r= = 0.8734
5 × 79900.00 − (630.00) 2 − 5 × 137328650 − (24860) 2

Coefficient of Determinants, r² = (0.8734)² = 0.7629

1− r2 1 − 0.7629
Probable Error, P.E. = 0.6745 × = 0.6745 × = 0.0713
n 5
n ∑ XY − ∑ X ∑ Y
Regression coefficient, b=
n ∑ X 2 − (∑ X ) 2
5 × 3206150.00 − 630.00 × 24860.00
= = 141.09
5 × 79900.00 − (630.00) 2

∑Y − b ∑ X 24860 − 141.09 × 630

Regression constant, a = = = -12907.90
n 5

r× n−2 0.8734 × 5 − 2
t - value, t = = = 3.1067
1− r2 1 − (0.8734) 2
 Everest Bank Limited
Year DPS(X) MVPS(Y) XY X2 Y2
2004/05 20 870 17400.00 400 756900
2005/06 20 1379 27580.00 400 1901641
2006/07 25 2430 60750.00 625 5904900
2007/08 40 3132 125280.00 1600 9809424
2008/09 50 2455 122750.00 2500 6027025
Total 155 10266 353760.00 5525.00 24399890

nΣXY − ΣXΣY
Correlation Coefficient, r =
nΣX 2 − (ΣX ) 2 − nΣY 2 − (ΣY ) 2

5 × 353760.00 − 155.00 × 10266.00

r= = 0.7262
5 × 5525.00 − (155.00) 2 − 5 × 24399890.00 − (10266.00) 2

Coefficient of Determinants, r² = (0.7262)² = 0.5273

1− r2 1 − 0.5273
Probable Error, P.E. = 0.6745 × = 0.6745 × = 0.1423
n 5
n ∑ XY − ∑ X ∑ Y
Regression coefficient, b=
n ∑ X 2 − (∑ X ) 2

5 × 353760.00 − 155.00 × 10266.00

= = 49.32
5 × 5525.00 − (155.00) 2

∑Y − b ∑ X 10266 − 49.32 × 155

Regression constant, a = = = 524.12
n 5

r× n−2 0.7262 × 5 − 2
t - value, t = = = 1.8293
1− r2 1 − (0.7262) 2
 APPENDIX 5

Calculation of Grand total, Correction Factor, Total Sum of Squares, Sum of Squares between and
within Samples for first hypothesis.
Year/Bank SCBNL(X1) HBL(X2) EBL(X3) X12 X 22 X 32
2004/05 120 31.58 20 14400 997.29 400
2005/06 140 35 25 19600 1225.00 625
2006/07 130 40 40 16900 1600.00 1600
2007/08 130 45 50 16900 2025.00 2500
2008/09 100 43.56 60 10000 1897.47 3600
Total 620 195.14 195 77800 7744.76 8725

Grand Total (T) = ΣX 1 + ΣX 2 + ΣX 3 = 620 + 195.14 + 195 = 1010.14

T2 1010.14 2
Correction Factor (CF) = = =68025.52
N 15
Total Sum of Squares (TSS ) = ΣX 12 + ΣX 22 + ΣX 32 − CF
= 77800 + 7744.76 + 8725 - 68025.52
= 26244.24
Sum of Squares between Samples (SSC)
(ΣX 1 ) 2 (ΣX 2 ) 2 (ΣX 3 ) 2
= + + − CF
n n n
(620) 2 (195.14) 2 (195) 2
= + + − 68025.52
5 5 5
= 24075.40
Sum of Squares within Samples (SSW)
= TSS - SSC
= 26244.24- 24075.40
= 2168.84
 APPENDIX 6

Calculation of Grand total, Correction Factor, Total Sum of Squares, Sum of Squares between and
within Samples for second hypothesis.

Year/Bank SCBNL(X1) HBL(X2) EBL(X3) X12 X 22 X 32

2004/05 143.14 47.91 54.22 20489.05 2295.37 2939.81
2005/06 175.84 59.24 62.78 30919.70 3509.38 3941.33
2006/07 167.47 60.66 78.42 28046.20 3679.63 6149.69
2007/08 131.92 62.74 91.82 17402.88 3936.31 8430.91
2008/09 109.99 61.9 99.99 12097.80 3831.61 9998.00
Total 728.36 292.45 387.23 108955.63 17252.30 31459.74

Grand Total (T) = ΣX 1 + ΣX 2 + ΣX 3 = 728.36 + 292.45 + 387.23 = 1408.04

T2 1408.04 2
Correction Factor (CF) = = = 132171.77
N 15
Total Sum of Squares (TSS ) = ΣX 12 + ΣX 22 + ΣX 32 − CF
= 108955.63 + 17252.29 + 31459.74 - 132171.77
= 25495.89
Sum of Squares between Samples (SSC)
(ΣX 1 ) 2 (ΣX 2 ) 2 (ΣX 3 ) 2
= + + − CF
n n n
(728.36) 2 (292.45) 2 (387.23) 2
= + + − 132171.77
5 5 5
= 21027.70
Sum of Squares within Samples (SSW)
= TSS - SSC
= 25495.89 - 21024.70
= 4471.19