Dividend Policy and Its Impact on Share Price

DIVIDEND POLICY AND ITS IMPACT ON SHARE PRICE

(ANALYSIS OF SELECTED “A” CLASS LISTED COMPANIES)

Submitted By Bijendra Bahadur Malla

Roll No.: 740090 Reg. No: 2007-2-22-0056

A Research Report Submitted To Prof. Dr. Prem Raj Pant

Apex College Pokhara University

In partial fulfillment of requirements for the course on Research Methodology

For the degree of Master of Business Administration

Kathmandu August, 2009

I

ACKNOWLEDGEMENTS

This Study has been under taken to analysis the “Dividend Policy and its Impact

on Share Price (Analysis of selected “A” Class Listed Companies)” under partial

fulfillment of the requirement of MBA degree. The thesis mainly covers the

dividend policy and its impact on share price of “A” class listed companies of

Nepal.

I would like to express my deep gratitude to Professor Dr. Prem Raj Pant, for his

kind support, advice and continuous support for the thesis writing.

I would like to express my deep greet to my respected supervisor, Mr. Pushpa

Raj Joshi and Mr. Bharat Singh Thapa for his continuous guidance and

supervision. The report in this form is the result of their inspiring and invaluable

guidance and supervision.

I express sincere thanks to all librarians of Apex College who helped me directly

and indirectly in the course of review of literature.

Finally, I would like to thank my family and friends for their help, blessings,

love and support for me to prepare for the thesis writing.

........…….……........ Bijendra Bdr. Malla

II

CERTIFICATE OF AUTHORSHIP

I, hereby declare that this submission is my own work and that to the best of my

knowledge and belief, it contains no materials previously published or written by

another person nor material which to a substantial extent has been accepted for the

award of any other degree of university or other institutions, except where due

acknowledgement is made in the acknowledgements.

Date: …………… ……………………

Bijendra Bdr. Malla

III

TABLE OF CONTENTS Acknowledgements I Certificate of Authorship II Table of Contents III List of Tables VI List of figures VII Abbreviations VIII Executive Summary XI

Chapter 1 Introduction

1.1 Background of the Study 1 1.2 The Problem Statement 5 1.3 Purpose of the Study 6 1.4 Significance of the Study 7 1.6 Limitations of the Study 7 1.7 Organization of the Study 8

Chapter 2 Review of Literature

2.1 Conceptual Framework 10 2.1.1 Meaning of Dividend 10 2.1.2 Theories Regarding Dividend 11 2.1.3 Types of Dividend 12

2.2 Dividend Policy 16 2.3 Factors Affecting Dividend policy 20 2.4 Payment Procedure Followed by Companies 23 2.5 Ex- dividend Day Tests 23 2.6 Quality Rating of Companies in Nepal 25 2.7 Legal Provision Regarding Dividend Practice in Nepal 26 2.8 Review of the International Studies 29 2.9 Review of the Thesis 43 2.10 Concluding Remarks

IV

Chapter 3 Methodology

3.1 The Research Design 44 3.2 The Population and Sample 44 3.3 Sources of Data 46 3.4 Methods of Data Analysis 46 3.5 Tools Used 46

3.5.1 Arithmetic Mean (A.M.) 46 3.5.2 Standard Deviation (S.D.) 47 3.5.3 Coefficient of Variation (C.V.) 47 3.5.4 Karl Pearson’s Correlation Coefficient (r) 47 3.5.5 T-statistics 48 3.5.6 F-statistics 48

Chapter 4 Presentation and Analysis of Data

4.1 No. of Cash Dividend paying listed companies 49 4.2 Cash Dividend Payment of sector-wise financial institutions 50

4.2.1 Cash Dividend Payment of Commercial Banks 50 4.2.2 Cash Dividend Payment of Development Banks 52 4.2.3 Cash Dividend Payment of Insurance Company 53 4.2.4 Cash Dividend Payment of Finance Company 53 4.2.5 Cash Dividend Payment of Manufacturing and Processing

Company 55

4.2.6 Cash Dividend Payment of Other Company 56 4.2.7 Cash Dividend Payment of Hotel 57 4.2.8 Cash Dividend Payment of Trading Company 58

4.3 Ex-dividend Test 58 4.3.1 For the Fiscal Year 2003/04 58 4.3.2 For the Fiscal Year 2004/05 59 4.3.3 For the Fiscal Year 2005/06 60 4.3.4 For the Fiscal Year 2006/07 61 4.3.5 For the Fiscal Year 2007/08 62

4.4 Test of Hypothesis 62 4.4.1 Test of Hypothesis on Cash Dividend Payment of Commercial

Banks 63

V

4.4.2 Test of hypothesis on Cash Dividend Payment of Development Banks

64

4.4.3 Test of Hypothesis on Cash Dividend Payment of Manufacturing and Processing Companies

65

4.5 Major Findings 66

Chapter 5 Summary and Conclusions

5.1 Summary of Findings 69 5.2 Conclusions 70 5.3 Recommendations 71 References Appendix

VI

LIST OF TABLES Table No.4.1 Number of Cash Dividend Paying listed company 49 Table No.4.2 Cash Dividend Payment of Commercial Banks 50 Table No.4.3 Cash Dividend Payment of Development Banks 50 Table No.4.4 Cash Dividend Payment of Insurance Company 53 Table No.4.5 Cash Dividend Payment of Finance Company 53 Table No.4.6 Cash Dividend Payment of Manufacturing and Processing

companies 55

Table No.4.7 Cash Dividend Payment of Other Company 56 Table No.4.8 Price effect after Cash Dividend Payment on

Fiscal Year 2003/04 58

Table No.4.9 Price effect after Cash Dividend Payment on Fiscal Year 2004/05

59

Table No.4.10 Price effect after Cash Dividend Payment on fiscal year 2005/06

60

Table No.4.11 Price effect after Cash Dividend Payment on fiscal year 2006/07

61

Table No.4.12 Price effect after Cash Dividend Payment on fiscal year 2007/08

62

Table No.4.13 One-way AVOVA table for Cash Dividend Payment of Commercial Banks

63

Table No.4.14 One-way AVOVA table for Cash Dividend Payment of Development Banks

64

Table No.4.15 One-way AVOVA table for Cash Dividend Payment of Manufacturing and Processing Companies

65

VII

LIST OF FIGURES Fig. No. 4.1 Number of Cash Dividend Paying Listed Companies 49 Fig. No. 4.2 Cash Dividend Payment of Commercial Banks 51 Fig. No. 4.3 Cash Dividend Payment of Development Banks 52 Fig. No. 4.4 Cash Dividend Payment of Finance Companies 54 Fig. No. 4.4 Cash Dividend Payment of Manufacturing and Processing

Companies 55

Fig. No. 4.5 Cash Dividend Payment of Other Companies 57

VIII

ABBREVIATIONS A.D. Anno Domini AFC Annapurna Finance Company Limited AGM Annual General Meeting A.M. Arithmetic Mean ANOVA Analysis of Variance BFL Bhajuratna Finance and Saving Company Ltd. BNL Bottlers Nepal Limited BOD Board of Directors CBBL Chimeki Bikas Bank Ltd. CDND Cash Dividend Not Declared C.F. Correction Factor CHPCL Chilime Hydropower Company Limited C.V. Coefficient of Variation DCBL Development Credit Bank Limited DPS Dividend per Share EBL Everest Bank Limited EFL Everest Finance Company Limited EPS Earning per Share

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EIC Everest Insurance Company Limited et.al and others Latin:et aili F/Y Fiscal Year HBL Himalayan Bank Limited HGI Himalayan General Insurance Company Ltd. Limited MPS Market Price per Share MSC Mean sum of square between columns MSE Mean sum of square due to error NABIL Nabil Bank Limited NEPSE Nepal Stock Exchange NIBL Nepal Investment Bank Limited NLIC Nepal Life Insurance Company Limited No. Number NPR Nepalese Rupees NRB Nepal Rastra Bank NUBL Nirdhan Utthan Bank Limited Rs. Nepalese Rupees SBB Sahayogi Bikas Bank Limited SBBL Sanima Bikas Bank Limited SBI Nepal SBI Bank Limited

X

SCBNL Standard Chartered Bank Nepal Limited S.D. Standard Deviation SEBON Securities Board of Nepal SSC Sum of square between samples SSW Sum of square within samples TSS Total Sum of Square UIC United Insurance Company (Nepal) Ltd. UNL Unilever Nepal Limited % Percent

XI

EXECUTIVE SUMMARY Dividend policy decision is one of the three decisions of financial management

because it affects the financial structure, the flow of funds, corporate liquidating and

investors’ attitudes. The main aspect of dividend policy is to determine the amount

of earning to be distributed the shareholder and the amount to be retained in the

firm. Divined policy involves the decision to pay out earning versus retaining them

for reinvestment in the firm. The relationship between dividend and the value of the

share is not clear cut. The financial manager must understand the various conflicting

factors which influence the dividend policy before deciding the allocation of its

company’s earnings into dividends and retain earnings.

This study focuses on the dividend practice and its influence in prospect of Nepal of

“A” class listed companies in Nepal. The empirical testing has been proved that ex-

day stock price tend to fall by significantly less than the dividend. They interpret the

result as consistent with a clientele effect where investors in high tax brackets show

a preference for capital gains over dividends and vice versa.

The number of cash dividend paying companies listed at NEPSE is seen almost the

same in context of total listed companies since last five fiscal year except 2004/05 in

which it comprise of 20.80 percent of total listed companies. It is also seen that

there is the low degree of positive correlation between the total number of listed

companies and the number of cash dividend paying listed companies. Most of the

finance company is not being capable of declaring cash dividend to their

shareholders. This study also wrap up that there is no significant difference between

the average MPS before and after the cash dividend payment of commercial banks,

development banks and finance company.

1

Chapter 1 Introduction

1.1 Background of the Study After the restoration of democracy in 1990 A.D., Nepal has implemented liberal

economic policy. As a result, many more companies are established in different

sectors such as industrial, tourism, transportation, trade and mostly in financial

sector who contribute to build up economy of the country. Nepal is a country trying

to develop its economy through global trend and cooperation with developed

countries.

The development of an economy requires expansion of productive activities, which

in turn is the result of the capital formation, which is the capital stock of the country.

The change in the capital stock of the country is known as investment. Investment is

key factor for capital formation. Investment promotes economic growth and

contributes to a nation’s wealth. Investor desire to earn some return from the

investment, without any return there is no any investment. Investment will block, if

there is no return. The total expected return include two components one is capital

gain and other is dividend.

In the capital market, all firms operate in order to generate earnings. Shareholders

make investment in equity capital with the expectation of making earning in the

form of dividend or capital gains. Thus, shareholders wealth can increase through

either dividend or capital gain. Once the company earns a profit, it should decide on

what to do with the profit. It could be continued to retain the profit within the

company, or it could pay out the profit to the owners of the company in the form of

dividend. Dividends are payment made to stockholders from a firm’s earning in

return to their investment. Dividend policy is to determine the amount of earnings to

be distributed to shareholders and the amount to be retained or reinvestment in the

2

firm. The objective of a dividend policy should be to maximize shareholder’s wealth

position.

Retained earnings are used for making investment in favorable investment

opportunities, which in turn help to increase the growth rate of the firm. What and

how much it is desirable to pay dividend is always a controversial topic because

shareholders expect higher dividend from corporation, but corporation ensure

towards setting aside funds for maximizing the overall shareholders’ wealth.

Management is therefore concerned with the activities of corporation that affect the

well being of shareholders. That well being can be partially measured by the

dividend received, but a more accurate measure is the market value of stock. But

stockholders think dividend yield is less risky than capital gain.

Dividends are payments made by a corporation to its shareholders. It is the portion

of corporate profits paid out to stockholders. When a corporation earns a profit or

surplus, that money can be put to two uses: it can either be re-invested in the

business i.e. retained earnings, or it can be paid to the shareholders as a dividend.

Many corporations retain a portion of their earnings and pay the remainder as a

dividend.

The most widely accepted objective of a firm is to maximize the value of the firm

and to maximize shareholder wealth. In general, there are three types of financial

decisions which might influence the value of a firm: investment decisions, financial

decisions and dividend decisions. These three decisions are interdependent in a

number of ways. The investments made by a firm determine the future earnings and

future potential dividends; and dividend policy influences the amount of equity

capital in a firm’s capital structure and further influences the cost of capital. In

making these interrelated decisions, the goal is to maximize shareholder wealth.

Dividends are decided upon and declared by board of directors. A firm’s profits

after-tax can either be used for dividends payment or retained in the firm to increase

shareholders' fund. This may involve comparing the cost of paying dividend with

3

the cost of retaining earnings. Generally, whichever component has a lower cost that

is where the profit after-tax will flow. However, there is a need to strike for a

balance because it is a zero sum decision.1 Although firms do not have obligations

to declare dividends on common stock, they are normally reluctant to change their

dividend rate policy every year as the firms strive to meet stockholders’ expectation,

build a good image among investors and to signal that the firm has stable earnings

to the public.

The theory of dividend and its effect on the value of the firm is perhaps one of the

most important yet puzzling theories in the field of finance. Academics have

developed many theoretical models describing the factors that managers should

consider when making dividend policy decisions. By dividend policy, we mean the

payout policy that managers follow in deciding the size and pattern of cash

distributions to shareholders over time. Miller and Modigliani (1961) argue that

given perfect capital markets, the dividend decision does not affect firm’s value and

is, therefore, irrelevant. However, most financial practitioners and many

academicians believe otherwise. They offered many theories about how dividends

affect firm’s value and how managers should make dividend policy decisions. Over

time, the number of factors identified in the literature as being important to consider

in making dividend decisions increased substantially. There are plenty of potential

determinants for the dividend decisions. The more prominent determinants include

protection against liquidity, after-tax earnings of the firm, liquidity and cash flow

consideration, stockholders' expectation/preference, future earnings, past dividend

practices, return on investment, industry norms, legal constraints, growth prospects,

inflation and interest rate. (Foong, Zakaria and Tan, 2007, p.98)

The development of an economy requires expansion of productive activities, which

in turn is the result of the capital formation, which is the capital stock of the country.

The change in the capital stock of the country is known as investment. Investment is

key factor for capital formation. Investment promotes economic growth and

contributes to a nation’s wealth. Investor desire to earn some return from the

4

investment, without any return there is no any investment. Investment will block, if

there is no return. The total expected return include two components one is capital

gain and other is dividend.

In the capital market, all firms operate in order to generate earnings. Shareholders

make investment in equity capital with the expectation of making earning in the

form of dividend or capital gains. Thus, shareholders wealth can increase through

either dividend or capital gain. Once the company earns a profit, it should decide on

what to do with the profit. It could be continued to retain the profit within the

company, or it could pay out the profit to the owners of the company in the form of

dividend. Dividends are payment made to stockholders from a firm’s earning in

return to their investment. Dividend policy is to determine the amount of earnings to

be distributed to shareholders and the amount to be retained or reinvestment in the

firm. The objective of a dividend policy should be to maximize shareholder’s wealth

position.

Retained earnings are used for making investment in favorable investment

opportunities, which in turn help to increase the growth rate of the firm. What and

how much it is desirable to pay dividend is always a controversial topic because

shareholders expect higher dividend from corporation, but corporation ensure

towards setting aside funds for maximizing the overall shareholders’ wealth.

Management is therefore concerned with the activities of corporation that affect the

well being of shareholders. That well being can be partially measured by the

dividend received, but a more accurate measure is the market value of stock. But

stockholders think dividend yield is less risky than capital gain.

In Nepal only few companies are paying dividend and the other companies are not

stable in the payment of dividend. There are some companies who have never paid

dividend to their investors throughout their historical background. It has been

noticed that company who has risen dividend generally experience on increase its

stock price and that a company don’t pay dividend or lowers it’s has a falling stock

price trend. It seems to suggest that dividend so matter, is affecting the stock price

5

of the company but several researchers argue the fact that dividend affect stock

price, rather it is the information declaration of dividend that affect the stock price.

It is fact that dividend work as a simple sufficient signal of management’s

interpretation of the firm’s recent performance and its future prospects.

1.2 The Problem Statement Dividend policy is an integral part of financial management decision of a business

firm. Dividend refers to that portion of a firm’s net earning which are paid out to the

shareholders. Whether dividends have an influential on the value of the firm is the

most critical question in dividend policy. If dividends are irrelevant, the firm should

retain earnings for investment opportunities. If there are not sufficient investment

opportunities providing expected returns in excess of the required return, the unused

funds should be paid out as dividends.

Dividend is the most inspiring factor for the investment on shares of the company is

thus desirable from the stockholder's point of view. In one hand the payment of

dividend makes the investors happy. But in the other hand the payment of dividend

decreases the internal financing required for making investment in golden

opportunities. This will hamper the growth of the firm, which in turn affects the

value of the stock.

Earnings are also treated as financing sources of the firms. The firm retains the

earning; its impact can be seen in many factors such as decreased leverage ratio,

expansion of activities and increase in profit in succeeding years. Whereas if firm

pays dividend, it may need to raise capital through capital that will affect on risk

characteristics of the firm. Therefore there are many dimensions to be considered on

dividend theories, policies and practices.

Shareholders make investment in equity capital with the expectation of making

earnings. Dividend is kind of earning that the shareholders expect form their

6

investment. But, the dividend decision is still a fundamental as well as controversial

area of managerial finance. The effect of dividend on market price of stock is the

subject matter of the study.

There are many empirical studies on dividend and stock price behavior. For

example, few of them are Linter (1956), Miller and Modigliani (1961), Durand and

May (1960), Friend and Puckett (1964), Fama and Babiak (1968), Elton and Gruber

(1970), Frank and Jagannathan (1998), Uddin (2003), Foong, Zakaria and Tan

(2007). However, conclusive relationship exists between the amount paid out in

dividend and the market price of the share. There is still a considerable controversy

concerning the relation between dividend and stock price.

Theoretically, the share price should fall down after the book closure by an amount

to the amount of cash dividend, in case the company is going to distribute cash

dividend. For example, if the share price of ABC Company on one day before the

book closure was Rs. 1000 and the company had declared Rs.70 per share as cash

dividend, which was to be formalized in the coming AGM. The price per share in

the first transaction after the book closure should be around Rs. 930.

1.3 Purpose of the Study The major objective of the study is to determine the trend and practices of dividend

payment by the Nepalese “A” class listed companies of Nepal from fiscal year

2003/04 to 2008/09 however the specific objective is are as follows.

• To examine the impact of dividend policy on market price of stock of “A”

class listed companies of Nepal.

• To explore the prevailing practices and effort made in dividend policy

among the companies.

• To identify the regularity and uniformity of dividend paying financial

institutions.

7

1.4 Significance of the Study In the capital market the investor can earn return in two ways, one is dividend and

another is capital gain. The term dividend is defined as a return from investment in

equity shares. So dividend is important factor for investor while investing in equity

shares. This study helpful to investor to take rational decision like where to invest,

how to invest, what portfolio should be made to obtain maximum profit from their

investment? When a new company floats shares through capital market, large

numbers of people gathers to apply for owner's certificate. It indicates people's

expectation on higher return of investment in shares. In Nepalese context, most of

investors are investing in the stock without adequate knowledge of the company and

performance and dividend policies. This study helps to aware the Nepalese

investors.

This study is useful for the firm’s perspective too. They know the investor

objective’s from this study. There are basically two types of objective one is

receiving dividend and another is receiving capital gain. Knowing the objective of

investor they can develop their plans and policies accordingly.

Basically this study is conducted to help the investor while investing in share

capital. So that they can make correct decision at right time about the influence of

dividend in market price of share and make investment.

1.5 Limitations of the Study

1. The study is mainly concentrated on the dividend practice and its influence

in prospect of Nepal of “A” class listed companies in Nepal.

2. The data being taken from secondary source, therefore authenticity of the

data is dependent on the accuracy of the information used.

8

3. The result and the interpretation are completely rigid and from the view

point of the researcher.

4. Among the different aspect of dividend policy only cash dividend is taken

for the analysis.

1.6 Organization of the Study The whole study has been divided into five chapters. Chapter 1 Introduction

In this chapter we deal with the introductory part of the study which includes

background of the study, statement of the problem, objective of the study,

significance and limitation of the study

Chapter 2 Review of Literature This chapter deals with review of the different literature in regard to the theoretical

analysis and review of book, articles and thesis related to this study.

Chapter 3 Methodology This chapter deals with research methodology used to carry out the research. It is

includes research design, population and sample, source and technique of data

collection, data analysis tools.

Chapter 4 Presentation and Analysis of Data This chapter is the main part of the study, which includes analysis and interpretation

of the data using financial and statistical tools. Similarly this chapter also includes

the major finding of the study.

9

Chapter 5 Summary and Conclusions Here we will give the summary and conclusions of the study and recommendations for further studies.

10

Chapter 2 Review of Literature

2.1 Conceptual Framework 2.1.1 Meaning of Dividend The term dividend is defined as a return from investment in equity shares. The profit

made by the firm which is distributed to the shareholders termed as dividend. Every

firm after making profit either retain the money for further investment or distribute

it among the shareholders. The firm should decide whether to keep the money as

retained earning or pay the dividend. It may be in cash, share and combination of

both. The dividend policy is the policy followed by the firm regarding the dividend

versus retention decision. Dividend policy of different organization may same or

different, but the policy followed by the firm should be suitable for both the

shareholders as well as the firm itself.

Dividend policy decision is one of the three decisions of financial management

because it affects the financial structure, the flow of funds, corporate liquidating and

investors’ attitudes. Dividend decision of the firm is a very crucial controversial

area of financial management. The main aspect of dividend policy is to determine

the amount of earning to be distributed the shareholder and the amount to be

retained in the firm. When a company pays dividend, the shareholder benefitted

directly. If the company retains the funds for investment opportunities, the

shareholders can be benefitted indirectly through future increase in the price of their

stock. Thus, shareholders wealth can be increase through either dividend or capital

gain. Divined policy involves the decision to pay out earning versus retaining them

for reinvestment in the firm. Any change in dividend policy has both favorable and

unfavorable effects on the firm’s stock price. Higher the dividend means higher the

immediate cash flows to investors, which is good, but lower future growth, which is

11

bad. The dividend policy should be optimal which balances the opposing forces and

maximizes stock prices.

Since the motive of shareholder is to receive returns on their investment. There is an

adverse relation between retained earning and cash dividend. When the amount of

retain earning is high, the company declares less dividend and when the high

dividend is paid than retain earning is reduced, which reduce the opportunity to

reinvest and expansion of the organization. So dividend decision is one of the major

decisions of managerial finance. This decision consist the decisive decision of

choosing between distributions of profit to shareholders or investing them back into

the business. Dividend decision has great influence on financial structure, flows of

funds, corporate liquidity and so on.

The relationship between dividend and the value of the share is not clear cut. The

financial manager must understand the various conflicting factors which influence

the dividend policy before deciding the allocation of its company’s earnings into

dividends and retain earnings.

In fact, dividend is the portion of the net earnings, which is distributed to the

shareholders by a company. After successfully completing the business activities of

a company, if the financial statement shows the net profit, the Board of Directors

(BOD) decides to declare dividend to the shareholders. Therefore, the payment of

corporate dividend is at the discretion of the BOD.

2.1.2 Theories Regarding Dividend

i. Residual theory Residual theory is that, in which the first priority is given to the profitable

investment opportunities. If there are profitable opportunities, the firm invest is

those and residual income (if any) is distribute to shareholders. Residual theory of

dividends means,’ A theory that suggests that the dividend paid by the firm should

be the amount left over after all acceptable investment opportunities have been

12

under taken.’ Using this approach the Firm would treat the dividend decision in

three steps as follows:

Step 1 Determine the optimum level of capital expenditure which would be the

level generated by the point of intersection of the investment

opportunities schedule (IOS) and weight managerial cost of capital

(WMCC) function.

Step 2 Using the optimal capital structure proportion, it would estimate the

total amount of equity financing needed to support the expenditures

generated in step 1.

Step 3 Because of the cost of retained earnings is less than the cost of new common

stocks; retained earnings would be used to meet the equity requirement

determined in step 2. If retained earnings are inadequate to meet this need,

new common stock would be sold. If the available retain earning are in

excess to this needs, the surplus amount would be distributed as dividends.

(Gitmen, 2001, p.544)

ii. Wealth maximization theory

Under wealth maximization theory, large dividends is announced and distributed to

shareholders in order to (or in hope with) maximize the wealth of the shareholders.

Basically, it is applicable for those companies, which are just established and to

those companies it will be beneficial whose financial profits are is decreasing

trends. The main purpose of the wealth maximization theory of dividend is to make

assurance to the stockholders that they are interesting in the firm, which has not

better market value.

2.1.3 Types of Dividend Keeping these theories into considerations, dividend can be paid in different forms.

Among them some are discuss below:

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a. Stock Dividend/Bonus Share

A stock dividend occurs when the board of directors authorizes a distribution of

common stock to existing shareholders. Stock dividend increases the number of

outstanding shares of the firm’s stock. Although stock dividend does not have a real

value, firms pay stock dividend as a replacement for a supplement to cash dividend.

Under stock dividend, shareholders receive additional shares of the company in lieu

of cash dividends. Stock dividend requires an accounting entry transfer from the

retained earnings account to the common stock and paid in capital accounts.

Rupees transferred from retained earnings = Number of shares outstanding *

Percentage of stock dividend * Market price of the stock.

This has the effect of increasing the number of outstanding shares of the company as

a result the decrease in EPS which effect the reduction in the market price of the

share. Since the shares are distributed proportionately, share holders retain his

proportionate ownership of the company.

b. Scrip Dividend A scrip dividend is a distribution of surplus to the stockholders in the form of notes

or promises to pay the amount of dividend at a certain time. The notes are called

dividend certificates or scrip. Sometime companies need cash generated by business

earning to meet business requirements or with-hold the payment of cash dividend

because of temporary shortage of cash. In such circumstance the company may

issue scrip dividend payable at future dates.

c. Bond Dividend

With the theory and concept of scrip dividend, if dividends are paid in the form of

bond (to shareholders), promising that it will mature in future date is known as bond

dividend. Therefore the intention and purpose of bond dividend is also the

postponement of dividend payment for some time. The only difference between

14

bond and scrip dividend is that bond carries relatively longer maturity date than

scrip dividend.

Bonds used to pay carry interest and it means that the company assumes the fixed

obligation of interest payment annually and principal amount of bond at maturity

date. Bond dividend posses the following characteristic:

• Bond dividends are the means to dividend postponement for a while but

more it is obligation.

• It couldn’t bring back the psychological value as the cash dividend.

• Bond and scrip dividend are same, only the difference between these are

maturity time i.e. scrip has relatively less maturity time than bond dividend.

d. Stock Split and Reserve Split A method that is commonly used to lower the market price of a firm’s stock by

increasing the number of shares belonging to each shareholder.

The effect of a stock split is an increase in the number of shares outstanding and a

reduction in the par, or stated, value of shares. The total net worth of the firm

remains unchanged. The stock split does not involve any cash payment, only

additional certificates representing new shares.

A method that is used to raises the market price of a firm’s stock by exchanging

certain number outstanding shares for one new share of stock.

The effect of a reverse split is a decrease in the number of shares outstanding and a

increase in the par, or stated, value of shares. The total net worth of the firm remains

unchanged. The reverse split does not involve any cash payment, only additional

certificates representing new shares.

When the market price of share of a company is falling gradually, the company may

adopt reserve split which may increase the market price of share and help to

maintain efficient situation of the company.

15

e. Stock Repurchase It is the process of repurchasing back outstanding share of any company. A

corporation’s repurchase of its stock can serve as a tax advantages substitute for

dividend payout. Repurchase have the effect of raising share prices so that

shareholders can be taxes at the capital gain rate instead of ordinary dividend rate on

cash dividend. Company can repurchase its shares in two ways:

• Open market repurchase

• Tender (Offer) repurchase

Open market repurchase usually (but not always) involve gradual programs to buy

back shares over a period of time. In tender offer, the company usually specifies the

number of shares it is offering to repurchase, a tender price and a period of time

during which the offer is in effect. If the number of shares actually tendered by the

shareholders exceeds the maximum number specified by the company, then the

purchases are usually made on a pro-rata basis. Alternatively, if the tender offer is

under subscribed the firm may decide to cancel the offer of extend to expiration

date. Share tendered during the extension may be purchased on either pro-rata or

first-come, first-served basis. (Weston and Copeland, 1991, 682)

The repurchase of stock holds major three reasons i.e. for stock option, for

acquisition and for retiring the stock. However, Nepalese Company Act 1997,

section 47 has prohibited company for repurchasing its own shares, it states that no

company shall purchase its own shares or supply loans against the security of its

own shares.

Stock is repurchased specially when the firm has abnormally high profits and is not

in a position to effectively utilize surpluses.

The repurchase effects are as follows:

• The stock repurchases reduce the number of outstanding stocks.

• It increases EPS and also DPS if the payout ration is not changed,

16

• It increases the proportional ownership of existing stockholders.

• It increases the stock price as net worth per share increases.

f. Cash Dividend

The most common way to pay dividend is in the form of cash. A company should

have enough cash in its bank account when cash dividends are declared. If the

company doesn’t have enough cash at the time of paying cash dividend,

arrangement should be made to borrow funds. Payment of cash dividend shouldn’t

lead to liquidity problem for the company.

The cash account and the reserve account of a company will be reduced when the

cash dividend is paid. Both the total assets and the net worth of the company are

reduced by the distribution of cash dividend. Beside the market price of the share

affected in most cases by the amount of cash dividend distributed.

Cash dividend has the direct impact on the shareholders. The volume of the cash

dividend depends upon earnings of the firm and on the management attitude or

policy. Cash dividend has psychological value for stockholders. Each and everyone

like to collect their return in cash rather than non-cash means. So cash dividend is

not only a way to earnings distribution but also a way of perception improvement in

the capital market. The objectives of the cash dividend are:

• To distribute the earnings to shareholders, as they hold the proportion of the

share.

• To build an image in the capital market so as to create favorable condition to

raise the fund at the needs.

• To make distribution easy and to account easily.

2.2 Dividend Policy Dividend policy determines the decision of earnings between payment to

stockholders and reinvestment in the firm. Retained earnings are one of the most

17

significant sources of funds for financing corporate growth, but dividends constitute

the cash flow that accrues to stockholders. (Weston and Copeland, 1991, p.657)

The third major decision of the firm is its dividend policy, the percentage of

earnings it pays in cash to its stockholders. Dividend payout, of course, reduces the

amount of earnings retained in the firm and affects the total amount of internal

financing. The dividend payout ratio obviously depends on the way earnings are

measured for case of exposition, we use account net earnings but assume that these

earning can form true economic earnings. In practice, net earning may not conform

and may not be an appropriate major of the ability of firm to pay dividends. (Van

Horne, 2000, p.350)

Dividend policy refers to the issue of how much of the total profit a firm should pay

to its stockholders and how much to retain for investment so that the combined

present and future benefits maximize the wealth of stockholders. The dividend

policy, however, not only specifies the amount of dividend, but also form of

dividend, payment procedure etc.

Dividend policy according to the application could be categorized as follows:

a. Stable dividend policy

When the firm constantly pays a fix amount of dividend and maintains it for all

times to come regardless of fluctuations in the level of its earnings, it is called a

stable dividend policy. This policy is considered as a desirable policy by the

management of companies. Most of the shareholders also prefer stable dividends

because all other things remaining same, stable dividends have a positive impact on

the market price of the share. By stability, we mean maintaining their positions in

relation to a trend live preferably one that is upward sloping. Three of the common

used dividend policies are:

18

i) Constant dividend per share Constant dividend policy is based on the payment of a fixed rupee dividend in each

period. A number of companies follow the policy of paying fixed amount per share

as dividend every period, without considering the fluctuation in the earnings of the

company. The policy does not imply that the dividend per share or dividend rate

will never be increased. When the company reaches new level of earnings and

expects to maintain it the annual dividend per share may be increased. Investors

who have dividends as the only source of their income prefer the constant dividend

policy.

ii) Constant payout ratio The ratio of dividend to earning is known as payout ratio. When fixed percentage of

earnings is paid as dividend in every period, the policy is called constant payout

ratio. Since earnings fluctuate, following this policy necessarily means that the

rupee amount of dividends will fluctuate. It ensures that dividends are paid when

profits are earned, and avoided when it incurs losses.

iii) Low regular plus extra policy The policy of paying a low regular dividend plus extras in a compromise between a

stable dividend (or stable growth rate) and a constant payout rate. Such a policy

gives the firm flexibility, yet investors can count on receiving at least a minimum

dividend. It is often followed by firms with relatively volatile earnings from year to

year. The low regular dividend can usually be maintained even when earnings

decline and extra dividends can be paid when excess funds are available.

b. No immediate dividend policy

If the company does not declare dividend unless the company earn large income is

called no immediate dividend policy. In other words, if there is not any hurry about

dividend payment and if it could be paid only when the company earns more profit

19

is known as no immediate dividend policy. This policy is usually pursued the

following circumstances:

• When the firm is new and rapidly growing concern, which needs large

amount of funds to finance its expansion program,

• When the firms’ excess to capital market is difficult,

• When availability of funds is costlier,

• When stockholders have agreed to accept higher return in future.

In fact, this policy should follow by issue of bonus shares.

c. Regular stock dividend policy

If the company regularly pays dividends to its shareholders in stock instead of cash,

then it is called regular stock dividend policy. Regular stock dividend policy is ale

designated as bonus shares. Such policy should follow under the following

circumstances:

• When the firm needs cash generated by earning to cover its modernization

and expansion of projects.

• When the firm is lacking in cash despite high earning, this is particularly true

when the firm’s sales is affected through credit and entire sales proceeds are

tied in receivables.

d. Irregular dividend policy

It is the policy in which, the firm does not pay any fixed amount of dividend every

year or dividend varied in correspondence with change in level of earning, i.e.

higher earnings means higher dividend and vice-versa. The firm with unstable

earnings also adopts this policy, when there are investable opportunities the

company retains more and when there is not any investable opportunities, the

company distributes the earning as dividend or there is not regularity of dividend

payment therefore it is the most used type of dividend policy in the Nepalese

context at present.

20

e. Irregular dividend policy This policy is based on the premise that investors prefer to have a firm retain and

reinvest earnings rather than pay out them in dividends if the rate of return the firm

can earn on reinvested earnings exceeds the rate of return investors can obtain for

themselves on other investments of comparable risk. Further, it is less expensive for

the firm to use retained earnings than is to issue new common stock.

2.3 Factors affecting Dividend Policy 2.3.1 Legal Requirements The legal rules provide that the dividends must be paid from earnings either form

the current year’s earnings or from past years’ earnings as reflected in the balance

sheet account ‘retained earnings’. State laws emphasize three rules:

a) Capital impairment Rules The firm cannot pay dividend out of its paid up capital. If it does so there would be

reduction in the capital that would affect the creditors of a corporation.

b) Insolvency Rule This rules state that cash dividend should be prohibited, if the company is insolvent.

Insolvency in the legal services defined as the situation when the recorded value of

liabilities exceeds the recorded value of assets. Similarly in the technical sense, it is

the firm’s inability to pay its current debtors.

c) Net profit rule This rule provides that dividend can be paid form past and present earnings.

21

2.3.2 Liquidity position The cash or liquidity position of the firm influences its ability to pay dividends. A

firm may have sufficient retained earnings, but if they are invested in fixed assets,

cash may not be available to make dividend payment. Thus, the company must have

adequate cash available as well as retained earning to pay dividends.

2.3.3 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 retain more

earnings to finance its operations. A well-established firm is thus likely to have a

higher dividend payout ratio than a new or small firm.

2.3.4 Need to repay debt Firms may have the policy to retire its past debts by means of retained earning. If

such alternative are being adopted then such firm will retain more and pays less

dividend.

2.3.5 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 (I) future dividends can be paid only out

of earnings generated after the signing of the loan agreement (i.e. they can not paid

out of past retained earnings) and (ii) that dividends cannot be paid when net

working capital 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.

22

2.3.6 Growth rate of firm

A rapidly growing concern will have constant needs of long-term funds to seize

favorable opportunities for which it has to retain more and pays less dividend.

2.3.7 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 dominant

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.

2.3.8 Stability of earnings A firm that has relatively stable earnings is often able to predict approximately what

its earnings will be. Such a firm is therefore more likely to pay out a higher

percentage of its earnings than a firm with fluctuating earnings. The unstable firm is

not certain that in subsequent years earning will be realized, so it is likely to retain a

high proportion of current earnings. A lower dividend will be easier to maintain if

earning fall off in the future.

2.3.9 Tax position of shareholders The tax position of a corporation’s owners greatly influences the desire for

dividends. For e.g. a corporation owned by largely taxpayers in high income tax

brackets tend toward lower dividend payout where as corporations owned by small

investors tend toward higher dividend payout.

23

2.4 Payment Procedure followed by Companies The actual payment procedure is of some importance, and the following is an

outline of the payment sequence.

1. Declaration date: This is the day on which board of directors declares the

dividend. At this time they set the amount of the dividend to be paid, the

holder-of-record date and payment date.

2. Holder-of-record date: This is the date the company opens the ownership

books to determine who will receive the dividend; the stockholders of record

on this date receive the dividend. In that date, the company closes its stock

transfer books and make up a list of the shareholders as of that day.

3. Ex-dividend date: The date when the right to the dividend leaves the stock is

called the ex-dividend date. In this case, the ex-dividend date is four days

before holder of record date. Therefore if someone wants to receive the

dividend, he/she must buy the stock four days before the holder of record day.

4. Payment date: This is the day when dividend checks are actually mailed to

the holders of record. (Weston and Copeland, 1992, p. 658)

2.5 Ex- dividend Day Tests The ex-dividend test involved the ex-dividend behavior of common stock prices.

Investors buying the stock before ex-dividend date are entitles to the dividend

declared; purchases on or after the ex-dividend date are not entitled to the dividend.

In one of the earliest published studies on the ex-dividend stock price anomaly is

that of Campbell and Beranek (1955) who reversed the general view that stock

prices drop by the full dividend amount on ex-days. Using data from the NYSE

stocks, they observed that the ex-dividend price drop was 90% of the dividend

24

amount. Durand and May (1960) conducted another seminal work examining the

ex-dividend day behavior of American Telephone and Telegraph stock (ATandT)

for a time series of 43 consecutive dividends. They found that the average price

change from the cum-dividend day to the ex-dividend day was $2.16, or about 4

percent less than the $2.25 dividend.

Elton and Gruber (1970) were the first researchers that offered a reasonable

explanation for the ex-dividend stock price anomaly. Using a one-year sample with

4,148 dividends, Elton and Gruber (1970) confirmed that ex-day stock prices tend to

fall by significantly less than the dividend and developed a model explaining the

effect known as “the long-term trading hypothesis” or “the tax-effect hypothesis”.

Elton and Gruber showed that when dividends are taxed at a higher rate than capital

gains, the stock price must drop by less than the dividend for investors to be

indifferent between (i) selling the stock cum-dividend and (ii) holding the stock,

receiving the dividend, and selling ex-dividend. Hence, in case that an investor

decides to sell on the cum-dividend day he receives the cum-dividend price (Pc) and

he pays tax at the capital gains rate (tg) on the excess of the cum-dividend price over

to the price at which the share was bought (Po). On the other hand, if he decides to

sell ex-dividend, he receives a dividend and the ex-dividend price (Pe) but he pays

tax on the dividend at the dividend tax rate (td) and he pays tax on the excess of the

ex-dividend price (Pe) over to the price at which the share was bought at the capital

gains tax rate (tg). The above relationship is given by:

Pc – (Pc-Po)tg = Pe – (Pe - Po) tg + D (1- td) (1) Rearranging Equation (1) we get:

g

dec

t1t1

DPP

−−

=−

Elton and Gruber (1970) argued that the statistic1 (Pc -Pe )/ D (or ∆ P/D) must then

reflect the marginal tax rates of the marginal stockholders and one should be able to

infer these tax rates by observing the above ratio.

25

Elton and Gruber (1970) sorted their sample into deciles by the dividend yield and

computed the mean ∆ P/D for each group. They found that NP/D generally increase

with the dividend yield, suggesting that investors in lower tax brackets prefer stocks

with higher dividend yields, while higher-bracket investors prefer lower-yield

stocks. Thus, Elton and Gruber (1970) confirmed the existence of the “dividend

clientele effect” as firstly proposed by Miller and Modigliani (1961).

Frank and Jagannathan (1998) examined the ex-dividend day stock price behavior in

the Hong Kong market, where neither dividends nor capital gains were taxed and

unlike in the NYSE, in the Hong Kong Stock Market (HKSE) there were no market

makers until 1993. They found that stock prices dropped on the ex-dividend day by

half the dividend amount. Frank and Jagannathan argued that the unexpected price

drop on the ex-dividend day was the result of transactions on the cum-dividend day

occurring at the bid price, while transactions on the ex-dividend day took place at

the asked price. That is, since for the average investor it is a burden to receive the

dividend and then go through the process of collecting it, most investors prefer not

to receive it. Market makers, instead, find themselves in a better position to collect

the dividend, so they buy the stock on the cum-dividend day. As a consequence, on

the cum-dividend day most trades occur at the bid price, while on the ex-dividend

day most trades occurred at the asked price. (Dasilas, 2007, p.1-8)

Similarly other many studies have been made in this matter. In a number of these

studies, the evidence is consistent with the previous, namely, that stock prices

decline on the ex-dividend day but less than the amount of the dividend. (Bhattarai,

2007, p.393)

2.6 Quality Rating of Companies in Nepal Nepalese capital market is still lacking an independent quality rating agency. But,

NEPSE, the sole secondary market of Nepal, categorizes the listed companies into

26

two categories: Category “A” and Category “B”, on different criteria. According to

the NEPSE criteria, only those companies are included in “A” categories that have:

• Paid-up capital exceeding Rs. 20 million

• Reported profit for the last three consecutive fiscal years

• Have at least 1,000 shareholders

• Shares of the company should be trading in the stock exchange for a price

above the face value

• The company should have submitted the annual report to NEPSE within six

months of the end of the fiscal year.

Organizations not falling under these criteria are kept in “B” category. If not

fulfilled the criteria for long-term by the financial institutions they are de-listed by

the NEPSE. (Bhattarai, 2006, p. 298)

2.7 Legal Provision Regarding Dividend Practice in Nepal Company Ordinance, 2005 makes some legal provision for dividend payment in

Nepal. These provisions may be seemed as under:

Dividends and subsections of this section are as follows

Section 46: Shareholder and Debenture-holder Register Book Subsection (1) Every company should establish shareholder and debenture-holder register book as

prescribed by law at company registrar office.

Subsection (2)

1. Following description should be clearly mentioned in the shareholders’

register book:

27

a) Shareholder’s full name and address.

b) No. of shares holding by shareholder.

c) Total amount paid by shareholder and remaining balance if any.

d) Registered date of shareholder’s certificate.

e) Cancellation date of shareholder’s certificate.

f) Ownership right on share after the death of the registered shareholder.

Section 182: Dividend Subsection (1) Expect in the following circumstances, dividend shall be distributed among the

shareholders within 45 days from the date of decision to distribute them,

a) In case any law forbids the distribution of dividends.

b) In case of right to dividend is disputed.

c) In case dividends cannot be distributed within the time limit mentioned

above owing to circumstance beyond anyone’s control and without any

fault on the part of the company.

Subsection (2) Government owned companies either fully or partly can’t issue dividend without

permission of government and also necessary direction in the matter of dividend.

Subsection (3) In case dividends are not distributed with the time limit mentioned in subsection

(1), adding interest at prescribed rate.

Subsection (4) Only the person whose name stands registered in the register of existing share

holders at the time of declaring the dividend shall be entitled to it.

28

Subsection (5) The Company can’t issue any form/amount as dividend expected separate reserve

amount for the distribution of dividend.

Subsection (6) The Company should deduct the operating cost, deprecation amount, payable,

adjustment for previous year’s losses by-law before distributing dividend from

profit.

Subsection (7) Under this section company can distribute interim dividend if it is provisioned in

rules and if the dividend is verified by audit report and attested by the BOD.

Subsection (8) Except the amount declared from AGM, the company cannot distribute dividend

from fund affecting the company’s reserve.

Subsection (9) If the shareholder does not come to take the dividend within the five F/Y from the

declaration date, the amount would be safe guarded according to section 186 of

company act.

Subsection (10) If any shareholder comes to take the dividend amount according to section 183

within 1 month of before the expiry date, the notice should be published publicly in

national daily.

29

Subsection (11) After the dividend declared form AGM, the company should establish separate book

of account within 45 days and distribute to the shareholders and the amount should

not be used for other purpose by the company.

2.8 Review of the International Studies Linter (1956) conducted a study, which is focused in the behavioral aspect of

dividend policy. He investigated dividend pattern of 28 different companies of

America and found that, firm generally predetermines the desired payout and tries to

achieve it and rarely considers other factors. The model developed firm is his

research is as follows:

DIV*t= pEPSt …………………………………….. (i) and, DIVt- DIVt-1=a+b (DIV*t- DIVt-1) +e1…….…… (ii) Or, DIVt=a+b DIV*t+ (a+b) DIVt-1 +e1…………… (iii) Where,

DIV*t = Firm’s desired payment

EPS = Earning per share

p = Targeted payout ratio

a = Constant relating to dividend growth

b = Adjustment factor relating to the previous period’s dividend and new

desired level or dividend where b<1.

Major finding of this study are as follows:

• Firms generally prefer desired proportion of earning to be paid as dividend.

• Investment opportunities are not considered for modifying the pattern of

dividend behavior.

30

• Firm generally have target payout ratios in view while determining change

in dividend per share.

Walter (1957) has proposed a model for share valuation which supports the view

that the dividend policy of the firm has impact on share valuation. His works shows

clearly the importance of the relationship between the firm’s internal rate of return

on investments (r) and its cost of capital (k) in determining the dividend policy that

will maximize the wealth of shareholders. Walters’s model is based on the

following assumptions (Chandra, 1999, p.302)

• Retained earnings represent the only source of financing for the firm.

• The return on the firm’s investment remains constant.

• The cost of the capital for the firm remains constant.

• The firm has an infinite life.

Walter’s formula to determine the market price per share is as follows.

kDPS)/kr(EPSDPS

kDPS)/kr(EPS

kDPSP −+

=−

==

Where

P = Market price per share

DPS = Dividend per share

EPS = Earning per share

r = Internal rate of return on investments

k = Cost of capital

In Walter’s model the optimum dividend policy depends on the relationship

between the firm’s internal rate of return on investment (r) and its cost of capital (k).

Walter’s view of the optimum dividend payout ratio can be summarize as follows:

31

Growth Firm r>k

Firm having r>k may be referred as growth firm. The optimum payout ratio for a

growth firm is 0. The market price per share increases as payout ratio decreases.

Normal Firm r=k

Firm having r=k may be referred as normal firm. There is no unique optimum

payout ratio for a normal firm. One dividend policy is a good as the other. The

market price per share is not affected by the payout ratio when r=k. The payout ratio

for a normal firm is irrelevant.

Declining Firm r<k

Firm having r<k may be referred as declining firm. The optimum payout ratio for a

declining firm is 100%. The market price per share increases as payout ratio

increases.

Thus, in Walter’s Model the dividend policy of the firm depends on the availability

of investment opportunities and the relationship between the firm’s internal rate of

return (r) and its cost of capital (k).

The firm should use earning to finance investment if r>k, should distribute all

earnings when r<k and would remain indifferent when r=k.

Modigliani and Miller’s (1961) model (M-M) dividend policy of the firm is

irrelevant. It doesn’t affect the wealth of the shareholder. They argue that the value

of the firm depends on the firms earning, which result from its investment policy.

The literature suggests that dividend payments should have no impact on

shareholders value in the absence of taxes and market imperfections. Hence,

companies should invest excess funds in the positive net present value projects

instead of paying out them to the shareholders.

32

Modigliani and Miller’s model hypothesis of irrelevance is based ion the following

assumptions. (Pandey, 2002, p.756)

• The firm operates in perfect capital markets where investors behave

rationally, information is freely available to all and transaction and floatation

cost do not exist. Perfect capital markets also imply that no investor is large

enough to affect the market price of share.

• Taxes do not exist or there is no difference in the tax rate applicable to the

capital gains and dividends. This means that investors value a rupee of

dividend as much as a rupee of capital gains.

• The firm has a fixed investment policy.

• Risk of uncertainty does not exist i.e. investors are able to forecast future

prices and dividend with certainty and one discount rate is appropriate for all

securities and all time periods. Thus, r=k=kt for all t.

Modigliani and Miller’s Model provide falling model to prove their theory.

Market Value of Share The market value of share at the beginning of the period is equal to the present of

dividend paid at the end of the period plus the market price of the share at the end of

the periods. Symbolically,

P0 = k1PD 11

++ (i)

Where

P0 = Market price of share at the beginning of the period

D1 = Dividend of the share at the end of the period

P1 = Market price per share at the end of the period

k = Cost of the equity capital

33

No External Financing If no external financing exist the market value of firm can be computed by

multiplying both sides by number of outstanding shares as follows:

V= nP0=( )

k1PDn 11

++ (ii)

Where V = Total value of the firm

n = Number of shares outstanding

New Shares If retain earning is not sufficient to finance the investment opportunities, issuing

new shares is the other alternatives. Assuming that m is the number of newly issued

equity share at the price of P1 the value of firm at time 0 will be:

nPo =( )

k1mPPmnnD 111

+−++ (iii)

Where nPo = Total market value of outstanding shares at time 0 n = Number of outstanding shares at time 0 nD1 = Total dividends in year 1 payable on equity shares

outstanding at time 0 m = Number of outstanding shares at time 1 at price P1 (n+m)P1 = Total market value of all outstanding shares at time 1 mP1 = Market value of shares issued at time 1 k = Discount rate Total numbers of shares A firm can pay dividends and raise funds to undertake the optimum investment

policy. The firm finances all investment opportunities either by issue of new shares

or retained earnings or both. Thus the amount of new shares issues will be:

mP1 = I1 – (E – nD1) (iv)

34

Where

I1 = Total investment at time 1

E = Total net profit of the firm

E-nD1 = Retained earning

Substituting equation (iv) to equation (iii) we get

nP0=( )

k1EIPmn 11

++−+

A firm, which pays dividends, will have to raise funds externally to finance its

investment plans. Modigliani and Miller’s argument, that dividend policy does not

affect the wealth of the shareholders, implies that when firm pays dividends, its

advantage is offset by external financing. This means that the terminal value of the

share decline when dividends are paid .Thus, the wealth of shareholders dividend

plus terminal price remains unchanged. As a result, the present value per share after

dividends and external financing is equal to the present value per share before the

payment of dividends. Thus the shareholders are indifferent between payments of

dividends and retention of earnings.

Gordon (1962) develops own very popular model explicitly relating the market

value of the firm to dividend policy. Gordon made a study on the dividend policy

and market price of the stock and concluded that the dividend policy of a firm

influences the market value of stock. He explained the investor’s preferred present

dividend rather that future capital gains. He further explained that the dividend

policy has direct relation with the value of stock even if the internal rate of return is

equal to the required rate of return.

Gordon’s model is based on the following assumptions:

• The firm is an all equity firm.

35

• No external financing is available. Consequently retain earning would be

used to financial expansion.

• The internal rate of return (r) of the firm is constant. This ignores the

diminishing marginal efficiency of the investment.

• The appropriate discount rate (k) for the firm remains constant.

• The firm and its stream of earning are perpetual.

• The tax does not exist.

• The relation ratio (b) ones decide upon, is constant. Thus the growth rate

g=br, each constant forever.

• k>br =g. if this condition is not fulfilled, we can’t get a meaningful value for

the share.

According to Gordon’s Dividend Capitalization Model the market value of a share

is equal to the present value of an infinite stream of dividend to be received by the

share. Thus:

P0 = ( ) ( ) ( )n1

n2

21

1

k1

D..............

k1

D

k1

D

++

++

+

Gordon has further developed the following equation for the computation of the

market value of stock.

P = EPS (1 – b)(Ke – br)

Where

P = market price per share

EPS = earning per share

b = retention ratio

ke = cost of capital

1-b = payout ratio

br = growth rate

Gordon’s relevant theory is a popular theory of dividend as investor’s prefer current

dividends earnings rather than expected higher future income so as to eliminate the

36

risk associated with future capital gain. Gordon stressed that the higher payout

increases the dividend yield and hence increases the value of stock. But the

assumption of this model is also far from the reality. (Pandey, 2002, p.751)

Friend and Puckett (1964) conducted a study on the relationship between dividend

policy and price of stock by running regression analysis on the data taken from 110

firms from five industries in the year 1956 to 1958. Industries taken as samples were

chemicals, electric utilities, food, steels, and electronics. These industries were

selected to permit a’ distinction made between the results for growth and non-

growth industries and to provide a basis for comparison with the results by other

authors for earlier years. They also considered cyclical and non-cyclical industries

in their study. The study period covered a boom year for the economy when stock

prices leveled off after rise (1956) and a depressed for the economy when stock

prices, however rose strongly (1958). They used dividends, retained earnings and

price earning ratio as independent variable in their regression model of price

function and dividends as supply function. Earnings, previous year’s dividend and

price earning ratio are independent variable in the dividend function. Symbolically,

their price function and dividend supply function are as follows:

Their study based on the following assumption:

• Dividends react with year-to-year fluctuation in earnings.

• Price doesn’t contain speculative components.

• Earnings fluctuation may not sum zero over the sample.

The regression results based on the equation of:

Pt= a + b Dt + CRt+dh(E/P)t-1 shows the customary strong dividend and relatively

weak retained earning in three of the five industries, i.e. chemicals, foods and steels.

They again tested other regression equation by addition of lagged earning price ratio

to the above equation and result the following equation:

Pt= a + bDt + CRt+d(E/P)t-1

37

Where,

Pt= Per share price at time t

Dt= Dividends at time t

Rt= Retain earning at time t

(E/P)t-1= Legged earning price ratio

Dividend supply function Dt= e + fEt +gDt-1 +d(E/P)t-1

Where,

Et= Earning per share at time t

Dt-1= Last year dividend

They found that more than 80% of the variation in the stock price could be

explained by three independent variables. Dividends have predominant influence of

stock price in the same three out of five industries but they found the difference

between the dividend and retained earnings coefficient are not quite so marked as in

the first set of regression. They also found that the dividend and retained earning

coefficient are closer to each other for all industries in the both the years except for

steels in 1956 and the correlations are higher again except for steels.

They also calculate the dividend supply equation (Dt= e + fEt +gDt-1 +d(E/P)t-1)

and derived price equation for four-industry group in 1958. The derived price

equation showed that there were no significant changes’ from those obtained in the

single equation approach as explained above. They argued that the stock price or

more accurately the price-earning ratio does not seem to have a significant effect on

dividend payout. On the other hand they noted that the retained earnings effect

increased relatively in the three of the four cases tested. Further their result

suggested, price effects on dividend supply are probably not a serious source of bias

on the customary deviation of dividend and retained earnings effects of short-term

income movement are sufficiently great. Further they used lagged price as a variable

instead of lagged earning price ratio and showed that more than 90 percent of

variation in stock prices can be explained by three independent variables and

38

retained earnings received greater relative weight than dividends in most of the

cases. The only exception was steels and food in 1958. They considered chemicals,

electronics, and utilities as growth industries in these groups and the retained

earnings effect was larger than the dividends effect for both the years covered. For

the other two industries, namely food and steels, there was no significant systematic

difference between the retained earnings and dividends coefficient.

Similarly, they tested the regression equation, Pt = a + bD, + cR, by using

normalized earnings again, which they obtained by subtracting dividends from

normalized earnings. This process of normalized earnings was based on the period

1950 to 1961. They again added prior year’s normalized earning price variable and

compared the results and found that there was significant role of normalized

earnings and retained earnings but the effect of normalized price earning ratio was

constant. When they examined the later equation they found that the difference

between dividend and retained earnings coefficient disappeared. Finally they

conclude that management might be able to increase price somewhat by raising

dividend in food and steel industries.

They conducted more detailed examinations of chemical samples which disclosed

that the result obtained largely reflected the undue regression weighting given the

three firms with price deviating most from the average price in the sample of twenty

firms and retained earnings as a price determinant.

Finally, Friend and Puckett concluded that, management might be able, at least in

some measure, to increase stock prices in non-growth by raising dividends payout

and in growth industries by greater retention.

Foong, Zakaria, and Tan (2007) investigated the relationship between individual

stock returns with dividend yield, dividend stability and changes in dividend yield

from 1992 to 2000 in the Malaysian Trading/Services and Plantation firms. The

statistical result from annually cross-sectional regression show weak evidence to

support the significant role of dividend yield and dividend stability in explaining

39

firm stock returns. Changes in dividend yield, on the other hand, have negative and

significant coefficients in explaining stock returns in Trading/Services firms

throughout 1993-1996 and the average crisis period. For Plantation firms, it is

negatively significant only in 1994 and 1997.

The main purpose in conducting this study was to identify the role of dividend in

explaining Malaysian firm stock returns. They tested the relationship of firm stock

returns with the so-called the dividend related variables, comprising dividend yield,

dividend stability and changes in dividend yield.

Although they do not obtained very strong results that the dividend related variables

are the main factors explaining firm stock returns, they do find that changes in

dividend play some role in explaining firm stock returns, especially of the

Trading/Services firms, which are essentially representing growth firms. If this

holds true across the whole Malaysia listed firms, this suggests that CEO and top

management of growth firms should pay careful attention to the changes of dividend

yield in their firms, which has an inverse relationship with the stock returns.

The frequent changes in firm dividend policy may be particularly useful in

attempting to differentiate high value firm from their low-value counterparts that

have high dividend payout levels. The negative sign documented implies that the

lower the changes in the dividend yield, the higher the stock returns. This suggests

that the management should try to minimize changes in the dividend yield.

Smoothing dividends payment over time can push the stock price to higher level.

Another option is to maintain the level of dividend yield by adjusting the dividend

payment relative to the stock price. Furthermore, announcing changes in the level of

dividend payment provides important information to investors and must be carefully

considered. This will eventually maximize the firm value; follow by the

maximization of shareholder wealth.

Uddin (2003) empirical results based on 137 samples of dividend paying companies

listed on Dhaka Stock Exchange (DSE) showed that investors do not gain value

40

from dividend announcement. Indeed shareholders lost about 20 percent of value

over a period of 30 days prior to the dividend announcement through to 30 days

after the announcement. The lost value may be partially compensated because of the

current dividend yield. Overall, the evidence tends to support the dividend

irrelevancy hypothesis. Evidence also indicates that dividend payment does not

signal any information to the investors.

The study shows that the highest average dividend was paid in the Fuel and Power

sector, followed by that in the banking sector. The highest dividend was announced

in the food sector, and lowest in the Jute and Services sectors. In Jute sector, only

one company announced dividend during the sample period. The average dividend

was 19.5 percent with standard deviation of 12.9 percent. Overall, the study shows

that the sample includes stocks from all sectors, except the paper sector. The

number of samples are also fairly equally distributed with 10 to 20 stocks from each

sector except Paper, Jute and Services sectors. This is also noted that out of 137

companies, 34 companies announced dividend in 2001 and 103 in 2003. Sample

also displays that 108 companies belong to A category, 17 belong to B category and

12 belong to Z category.3

Fama and Babiak (1968) study has proven that there is significant positive

relationship between the change of a firm’s dividend payment and change in its

stock price. Fama and Babiak (1968) find a time series relation between annual

dividends and earnings that is consistent with the view that dividend paying firms

increase their dividend only when management is relatively confident that their

higher payment can be maintained. Their view is supported by Capstaff, et al.

(2004), who found that stock market reaction is more pronounced for large, positive

dividend announcements that are followed by permanent cash flow increases.

Anagho and Tah (2007) in their case study "The ex-dividend day stock price

behavior," studied the movement of ex-dividend day stock price behavior for the

FTSE100 stock index for the period 2001 to 2006. The study was carried out by

41

comparing the actual value of the raw price ratio, market adjusted price ratio, raw

price drop and market adjusted price drop to their theoretical values. The difference

was tested for significance using the one sample t-test. The results showed that there

are significant differences in the observed figures from their theoretical or expected

values. The observed raw price ratio is higher than the expected value of 1, implying

that the stock price on the ex-dividend day drops by an amount that is higher than

the dividend paid. Similarly, the market adjusted raw price ratio is also higher than

the expected value of 1. The raw price drop and market adjusted price drop are

lower than the dividend yield, indicating again that the stock price drops by an

amount that is less than the dividend paid. The study is inconsistent with the

findings by Nikolas et al (2006), who studied the ex-dividend day stock price

behavior in the SHSE and SZSE indices of the Chinese Stock Exchange using a

similar method but consistent with Alm et al (1999) who carry out a study using the

Stockholm stock exchange where his findings showed that the stock price drop on

average is less than the dividend been paid out.

• Raw Price Ratio (RPR) is the drop in share price expressed as a fraction of

the difference between the cum-dividend price and the ex-dividend price all

over the actual dividend paid. Under normal circumstances, that is, where

there are no arbitrage opportunities and where the market efficiency

hypothesis is assumed to be true, the theoretical value of the raw price ratio

should be equal to 1.

• Market Adjusted Price Ratio (MAPR) is the difference between the cum-

dividend price and the market adjusted ex-dividend price expressed as a

fraction of the actual dividend. Similarly under perfect capital markets, the

theoretical or expected value of the market adjusted raw price ratio is equal

to 1.

• Raw Price Drop (RPD) is the difference between the cum-dividend price and

the ex-dividend price expressed as a fraction of the cum-dividend price. In

42

perfect capital markets, the hypothesized value of the raw price drop is

equivalent to the dividend yield.

• Market Adjusted Price Drop (MAPD) is the difference between the cum-

dividend price and the market adjusted price expressed as a fraction of the

cum-dividend price. Also, under perfect capital markets, the market adjusted

price drop is equivalent to the dividend yield.

2.9 Review of the Thesis Adhikari (2063) in his study on “Comparative Study of Dividend Policy and

Practices of Commercial Banks” found that there were irregularities in the dividend

payment by the commercial banks of Nepal. There was also no stability in the

dividend payout ratio of the commercial banks. Thus he has recommended the

investors to consider the select company having high profit companies for

purchasing shares.

Bista (2062) in his study on the “Dividend Policy and Practices of Listed Joint

Venture Commercial Banks and Manufacturing Companies” found that there was a

positive correlation between DPS and MPS of commercial banks whereas no

correlation was found in manufacturing companies.

Bhattarai (2052) his study on “Dividend Decision and Its Impact on Stock

Valuation” concluded that there is a positive relationship between cash flow and

current profit and dividend percentage of share. There are no criteria to adopt

dividend payout ratio and it is observed that there is a negative relationship between

payout ratio and valuation of shares. Similarly he found that there was a negative

relationship between MPS and stockholders’ required rate of return also.

43

2.10 Concluding Remarks The empirical testing has been proved that ex-day stock price tend to fall by

significantly less than the dividend. They interpret the result as consistent with a

clientele effect where investors in high tax brackets show a preference for capital

gains over dividends and vice versa. Another study examining the ex-dividend day

behavior of American Telephone and Telegraph stock for a time series of 43

consecutive dividends has found that the average price change from the cum-

dividend day to the ex-dividend day was $2.16, or about 4 percent less than the

$2.25 dividend.

Some argue that dividend policy of is irrelevant. It doesn’t affect the wealth of the

shareholder. They said that the value of the firm depends on the firms earning,

which result from its investment policy. Dividend payments should have no impact

on shareholders value in the absence of taxes and market imperfections.

Another study by Gordon on the dividend policy and market price of the stock and

concluded that the dividend policy of a firm influences the market value of stock

that explains the investor’s preferred present dividend rather that future capital

gains. He further explained that the dividend policy has direct relation with the

value of stock even if the internal rate of return is equal to the required rate of

return.

44

Chapter 3 Methodology

This chapter presents the short outline of the methods applied in the process of

analyzing the capital structure is a systematic method of finding out solution to a

problem whereas research methodology refers to the various sequential steps to

adopt by a researcher in studying a problem with certain objective in view.

3.1 The Research Design For the analysis of the cash dividends payments of the “A” class financial

institutions of Nepal as categorized by NEPSE, analytical as well as descriptive

designs are applied to achieve the objective of the research.

3.2 The Population and Sample 3.2.1 Population

Mainly the “A” class financial institutions as categorized by NEPSE are the

population samples considered for the study.

3.2.2 Sample

Our sample is selected from firms listed on the NEPSE. This study focuses on the

“A” class financial institutions of Nepal. At present, there are 157 companies are

listed at NEPSE out of which 78 are categorized as “A” class financial institutions.

45

Out of which 23 financial institutions are taken covering 26.92% ≅27% of the

population as sample ( 100%7821× ).

Commercial Banks

1. Development Credit Bank Ltd.

2. Everest Bank Ltd.

3. Himalayan Bank Ltd.

4. NABIL Bank Ltd.

5. Nepal Investment Bank Ltd.

6. Nepal SBI Bank Ltd

7. Standard Chartered Bank Nepal Ltd.

Development Banks

8. Chimeki Bikas Bank Ltd.

9. Nirdhan Utthan Bank Ltd.

10. Sanima Bikas Bank Ltd

11. Sahayogi Bikas Bank Ltd.

Finance Companies

12. Annapurana Finance Company Ltd.

13. Bhajuratna Finance and Saving Company Ltd.

14. Everest Finance Company Ltd.

Insurance Companies

15. Everest Insurance Company Ltd.

16. Himalayan General Insurance Company Ltd.

17. United Insurance Company (Nepal) Ltd.

18. Nepal Life Insurance Company Ltd.

Manufacturing and Processing Companies

46

19. Unilever Nepal Ltd.

20. Bottlers Nepal Ltd. ( Not an “A” Class Financial Institution)

Hydropower Companies

21. Chilime Hydropower Company Ltd.

3.3 Sources of Data This research is based on secondary data. Required data is collected from NEPSE,

SEBON, previous thesis and various articles published by various people and

organizations. The basic sources of data used are as follows:

a. NEPSE and SEBON Annual Reports

b. Financial statements of concerned financial institutions

c. Related books and articles

3.4 Methods of Data Analysis Mainly financial methods are applied for the purpose of this study. Appropriate

statistical tools are also used. Among them correlation analysis and hypothesis tests

regarded as major one used for this research.

3.5 Tools Used 3.5.1 Arithmetic Mean (A.M) The mean is the figure we get when the total of all the values in a distribution is

divided by the number of values in the distribution. The arithmetic mean is also

known as the average. It should, however, be remembered that the mean can only be

47

calculated for numerical data. The mean is an appropriate term than saying average.

The mean of data is biased toward extreme values. The mean is suitable when the

scores are distributed symmetrically about the center of the distribution. This is

calculated by using following formulae:

3.5.2 Standard Deviation (S.D.)

The measurement of the scatterness of the mass of figure in a series about an

average is known as the dispersion. The standard deviation measures the absolute

dispersion. The greater amount of dispersion, greater the standard deviation. A small

standard deviation means a high degree of uniformity of the observation as well as

homogeneity of a series and vice-versa. This is calculated as follows:

∴Standard deviationn

)X(X(S.D.)

2∑ −=

3.5.3 Coefficient of Variation (CV)

The coefficient of variance is the relative measure of dispersion, comparable across

distribution, which is defined as the ratio of the standard deviation to the mean

expressed in percent. It is calculates as follows:

∴Coefficient of Variation 100MeanS.D.(CV) ×=

3.5.4 Karl Pearson’s Correlation Coefficient (r)

If two quantities vary in such a way that movements in the one are accompanied by

movement in other, these quantities are correlated. The degree of relationship

between the variables under consideration is measure through the correlation

analysis. Correlation analysis only helps in determining the extent to which the two

variables are correlated but it does not tell us about cause and effect relationship.

∴Karl Pearson’s Correlation Coefficient (r)∑∑

∑=22 yx

xy

48

The value of “r” lies between -1 to +1. When r=0, then there is no correlation between two variables. 3.5.5 T-statistics To test the validity of our assumption, if the sample size is less than 30, t-test is

used. For applying t-test in context of small sample the t-value is calculated first and

compared with the t-value on table at certain level of significance for given degree

of freedom. If calculated value of ‘t’ exceeds the tabulated value (say 0.05) we can

say that the difference is significant at 5% level and vice-versa. The value is

calculated by using following formula:

nS

µXt −=∴

3.5.6 F-statistics ANOVA is a statistical technique especially designed to test whether the means of

more than two quantitative populations are equal. It is applied to find out whether

the two samples may be regarded as drawn form the normal population having the

same variance. The value of “F” is calculated as:

samples within Variancesamplesbetween VarianceF =∴

49

Chapter 4 Presentation and Analysis of Data

This is an analytical chapter, where an attempt has been made to analyze and

evaluate the data collected. To analyze the data collected various presentation and

interpretation is done in order to fulfill the objective of this study.

4.1 No. of Cash Dividend Paying Listed Companies

Table No. 4.1 No. of Cash Dividend Paying Listed Companies

F/Y Total Listed Companies Cash Dividend Paying Companies Ratio 2003/04 114 32 28.07% 2004/05 125 26 20.80% 2005/06 135 37 27.41% 2006/07 135 39 28.89% 2007/08 142 41 28.87%

Source: Annual Report of SEBON

020406080

100120140

2003/04 2004/05 2005/06 2006/07 2007/08

Fiscal Year

Cas

h Di

vide

nd (I

n Rs

.)

Total Listed Companies Cash Dividend Paying Listed Companies

50

Figure No. 4.1 No. of Cash Dividend Paying Listed Companies

The number of Nepalese listed companies that paying cash dividend is seen

fluctuating. About 28% of the total listed companies distributed cash dividend

during the fiscal year 2003/04. But it decreases to 20.80% in the fiscal year 2004/05.

Thereafter the increase has been seen to the fiscal year 2007/08. Among the cash

dividend paying total financial institutions majority are from the banking sectors or

finance companies. Very few numbers of financial institutions are from

development banks, manufacturing and processing companies and hydropower

company.

From the correlation calculation we came to conclusion that there is very low degree

of positive correlation between the total no. of listed companies and the no. of cash

dividend paying listed companies. Though, the general public is highly attracted

towards the shares of the commercial banks of the country as they are performing

well in the secondary market. Similarly they are providing the stock dividend to the

shareholders. But the financial performance of other institutions is not so good.

Even majority of the commercial banks are also not providing good percentage of

the cash dividend to their shareholders.

Note: For detail calculation see Annex-I 4.2 Cash Dividend Payment of Sector-wise Financial Institutions 4.2.1 Cash Dividend Payment of Commercial Banks Table No.4.2

Cash Dividend Payment of Commercial Banks (In NPR) F/Y EBL NABIL NIBL SCBNL HBL SBI DCBL

2003/04 20 50 20 110 1.32 8 10 2004/05 20 65 15 110 CDND CDND 10 2005/06 20 70 12.58 120 11.5 CDND 12 2006/07 25 85 20 130 30 5 12

51

2007/08 10 100 5 80 15 10 12 A.M. 19 74 14.52 110 11.56 4.60 11.20 S.D. 4.90 17.15 5.56 16.73 10.86 4.08 0.98 C.V. 25.78% 23.17% 38.29% 15.21% 93.94% 88.69% 8.75%

Source: Annual Report of SEBON

0

20

40

60

80

100

120

140

2003/04 2004/05 2005/06 2006/07 2007/08Fiscal Year

Cas

h Di

vide

nd (I

n R

s.)

EBL NABIL NIBL SCBNL HBL SBI DCBL

Figure No. 4.2 Cash Dividend Payment of Commercial Banks

Large amount of cash dividend paying “A” class commercial banks of the sample

are seen SCBNL. The average payment of cash dividend by SCBNL is Rs.110 per

share. In other word it paid average 110% cash dividend in average to its

shareholders. The least average percent was of SBI with only 4.60% cash dividend.

Being an “A” class financial institution SBI has not been able to declare cash

dividend to its shareholders. The amount it has declared also is also not seen so

satisfactory from the record than the other commercial banks.

The situation of the NABIL bank is also seen well. It has also been distributing cash

dividend regularly. The average cash dividend payment is seen 74% i.e. Rs. 74 per

share.

52

HBL payment of cash dividend has been seen fluctuating. The amounts it has paid

as a cash dividend is minor with average of Rs.11.56.

The C.V of the DCBL is the least among the sample commercial banks with 8.75%,

show the cash dividend payment of the bank is most consistent than other

commercial banks. The most inconsistent in paying cash dividend is HBL with C.V.

93.94%. The situation of SBI is also not good, it’s C.V, is also seen high.

4.2.2 Cash Dividend Payment of Development Banks

Table No.4.3 Cash Dividend Payment of Development Banks (In NPR)

F/Y SBBL NUBL CBBL SBB 2003/04 CDND CDND CDND CDND 2004/05 CDND CDND CDND CDND 2005/06 CDND 4 10 CDND 2006/07 CDND 5 30 CDND 2007/08 CDND CDND CDND 3.50

A.M. - 1.8 8.00 0.70 S.D. - 2.23 11.66 1.40 C.V. - 123.89 145.75 200%

Source: Annual Report of SEBON

53

0

5

10

15

20

25

30

35

2003/04 2004/05 2005/06 2006/07 2007/08Fiscal Year

Cash

Div

iden

d (In

Rs.

)

SBBL NUBL CBBL SBB Figure No. 4.3 Cash Dividend Payment of Development Banks

Being categorized as an “A” class development banks, the situation of cash dividend

payment of the bank is not seen good. Only NUBL and CBBL have been seen

paying the cash dividend in fiscal year 2005/06 and 2006/07 with average of Rs.

1.80 and Rs. 8 per share respectively. Other development banks have not seen

paying cash dividend since past five years.

4.2.3 Cash Dividend Payment of Insurance Company

Table No.4.4 Cash Dividend Payment of Insurance Companies (In NPR)

F/Y UIC NLIC HGI EIC 2003/04 CDND CDND CDND CDND 2004/05 CDND CDND CDND CDND 2005/06 CDND CDND CDND CDND 2006/07 CDND CDND CDND CDND 2007/08 CDND CDND CDND CDND

A.M. - - - - S.D. - - - - C.V. - - - -

Source: Annual Report of SEBON

54

The cash dividend situations of the Insurance Companies are not good in record.

None of the Insurance Companies listed as “A” class financial institutions have

declared cash dividend since past five fiscal year.

4.2.4 Cash Dividend Payment of Finance Company

Table No.4.5 Cash Dividend Payment of Finance Companies (In NPR)

F/Y AFC EFL BFL 2003/04 12 CDND CDND 2004/05 2.632 CDND CDND 2005/06 3.158 CDND CDND 2006/07 0.53 CDND CDND 2007/08 1.05 CDND 0.50

A.M. 3.87 - 0.10 S.D. 4.18 - 0.2 C.V. 108.01% - 200%

Source: Annual Report of SEBON

0

2

4

6

8

10

12

14

2003/04 2004/05 2005/06 2006/07 2007/08Fiscal Year

Cash

Div

iden

d (In

Rs.

)

AFC EFL BFL

Figure No. 4.4 Cash Dividend Payment of Insurance Company

55

There is large no. of finance companies operating in Nepal. But most of them are

not able to operate in an efficient ways. Their financial position is not so sound to be

categorized as an “A” class financial institution. They are not been able to pay cash

dividend to their shareholders. AFC has been paying cash dividend with average of

Rs. 3.87 per share in last five fiscal year. BFL has been paid Rs. 0.50 per share cash

dividend in the fiscal year 2007/08.

4.2.5 Cash Dividend Payment of Manufacturing and Processing Company

Table No.4.6 Cash Dividend Payment of Manufacturing and Processing Companies (In

NPR) F/Y ULN BNL

BNL(Balaju) BNL(Terai) 2003/04 90 5 10 2004/05 100 CDND 5 2005/06 400 CDND CDND 2006/07 250 CDND CDND 2007/08 275 CDND CDND

A.M. 223 1 3 S.D. 116.26 2 4 C.V. 52.13% 200% 133.33%

Source: Annual Report of SEBON

56

0

50

100150

200

250

300350

400

450

2003/04 2004/05 2005/06 2006/07 2007/08Fiscal Year

Cash

Div

iden

d (In

Rs.

)

ULN BNL (Balaju) BNL (Terai)

Figure No. 4.5 Cash Dividend Payment of Manufacturing and Processing Companies

Under manufacturing and processing companies, only one company has been

included under the “A” class financial institution i.e. ULN. The company has been

paying the cash dividend regularly in the past five fiscal year. Similarly, the amount

of the cash dividend is seen increasing to fiscal year 2005/06 and it has been

decreased to Rs. 250 per share and have been slight increase of Rs. 25 per share in

fiscal year 2007/08. BNL is not included under the “A” class financial institution

but we have taken as a sample from the manufacturing and processing companies

for study. It has not been able to distribute cash dividend with good amount being

one of the renowned multinational soft drink company.

BNL (Terai) has paid cash dividend of Rs. 10 and Rs. 5 in the early fiscal years. The

C.V. of BNL (Terai) is lesser than that of BNL (Balaju).

4.2.6 Cash Dividend Payment of Other Company

57

Table No.4.7

Cash Dividend Payment of Other Company (In NPR) F/Y 2003/04 2004/05 2005/06 2006/07 2007/08

CHPCL CDND CDND CDND 35 30 A.M. 13 S.D. 16 C.V. 123.08%

Source: Annual Report of SEBON

05

1015

20253035

2003/04 2004/05 2005/06 2006/07 2007/08Fiscal Year

Cas

h Di

vide

nd (I

n Rs

.)

CHPCL

Figure No. 4.6 Cash Dividend Payment of Other Company

58

Under this sector only three companies are listed. They are National Hydropower

Company Ltd., Butwal Hydropower Company Ltd. and Chilime Hydropower

Company Ltd. CHPCL has declared Rs. 35 and Rs. 30 cash dividend in the fiscal

year 2006/07 and 2007/08 respectively. But in earlier fiscal year it has not been able

to declare cash dividend.

4.2.7 Cash Dividend Payment of Hotel None of the institutions under the hotel sector has distributed cash dividend to its

shareholders since last five fiscal year except Soaltee Hotel Ltd. in fiscal year

2007/08 which pays Rs. 10 cash dividend per share. And even they did not come

under the “A” class financial institutions as categorized by NEPSE.

4.2.8 Cash Dividend Payment of Trading Company Since none of the trading company come under “A” class even though they are

paying healthy amount of cash dividend to their shareholders since last five fiscal

year.

4.3. Ex-dividend Test (Empirical Testing) 4.3.1 For the Fiscal Year 2003/04

Table No.4.8 Price Effect after Cash Dividend Payment on Fiscal Year 2003/04 (In NPR)

S No Company Name MPS Before

MPS on Ex-dividend

Date

MPS After

Price Change On Ex-

dividend Date

After Ex-dividend

Date 1. DCBL 152 2003/11/12 157 +9 +5

59

161 2. SCBNL 1763 2003/12/05 1701 +12 -3

1775 3. EBL 445 2003/12/21 442 -1 -3

444 4. AFC 417 2003/12/21 350 -7 -67

410 5. NABIL 803 2004/01/04 798 -3 -5

800 6. HBL 995 2004/03/21 662 -5 -333

990 7. SBI 242 2004/03/28 243 -1 +1

241

From the above table we see that MPS of the five companies who declared the cash

dividend has declined on the ex-dividend date during the fiscal year 2003/04. The

large amount loser company was HBL with the MPS decline of Rs. 333. The MPS

of SCBNL was seen increased by Rs. 12 on the ex-dividend date.

4.3.2 For the Fiscal Year 2004/05

Table No.4.9 Price Effect after Cash Dividend Payment on Fiscal Year 2004/05 (In NPR)

S No Company Name

MPS Before

MPS on Ex-dividend

Date

MPS After

Price Change On Ex-

dividend Date

After Ex-dividend

Date 1. EBL 687 2004/10/31 682 -2 -5

685 2. UNL 1487 2004/12/17 1500 +13 +13

1500 3. SCBNL 1860 2004/12/02 1839 -30 -21

1830 4. DCBL 201 2004/12/18 211 +7 +10

208 5. NABIL 1259 2004/12/22 1248 +6 -11

1265 6. NIBL 1152 2004/12/25 1160 +3 +8

1155

60

Principally, the MPS of the shares should decline on the ex-dividend date and after

this date after the declaration of the cash dividend by the companies. But from the

above data we see that the MPS of UNL, DCBL, NABIL and NIBL increased by

Rs.13, Rs.7, Rs.6 and Rs38 respectively. Only the MPS of EBL and SCBNL has

declined by Rs. 2 and Rs. 30 respectively on ex-dividend date and Rs. 5 and Rs. 21

after ex-dividend date.

4.3.3 For the Fiscal Year 2005/06

Table No. 4.10 Price Effect after Cash Dividend Payment on Fiscal Year 2005/06 (In NPR)

S. No. Company Name

MPS Before

MPS on Ex-dividend

Date

MPS After

Price Change On Ex-

dividend Date

After Ex-dividend

Date 1. UNL 2180 2005/09/09 1845 +20 -335

2200 2. SCBNL 2392 2005/10/26 2373 +38 -19

2430 3. DCBL 257 2005/11/08 257 +8 -

265 4. NABIL 1660 2005/11/30 1645 -10 -15

1650 5. NIBL 792 2005/12/14 783 -7 -9

785 6. HBL 1135 2005/12/16 1119 +5 -16

1140 7. AFC 577 2005/12/26 420 +50 -157

627

Similar is the situation in the fiscal year 2005/06. The MPS of majority of the cash

dividend declaring companies is seen increased. Except the MPS of NABIL and

NIBL, majority of the company’s MPS has increased on ex-dividend date whereas

MPS of all the company has decreased after ex-dividend date. UNL lose Rs.335

after ex-dividend date. Similarly, AFC also lose Rs. 157 after ex-dividend date.

61

4.3.5 For the Fiscal Year 2006/07

Table No. 4.11 Price Effect after Cash Dividend Payment on Fiscal Year 2006/07 (In NPR)

S No

Company Name MPS Before

Ex-dividend Date

MPS After

Price Change On Ex-dividend

Date After Ex-

dividend Date 1. UNL 2823 2006/09/05 2833 -13 +10

2810 2. NABIL 2312 2006/10/22 2320 +28 +8

2340 3. NIBL 1447 2006/10/26 1712 -12 +265

1435 4. EBL 1328 2006/10/31 1421 +17 +93

1345 5. SCBNL 4285 2006/11/08 4357 +115 +72

4400 6. HBL 1303 2006/12/15 1301 -3 -2

1300 7. DCBL 809 2006/12/25 813 -4 +4

805 8. CBBL 102 2006/12/26 124 -3 +22

105 9. CHPCL 757 2007/01/08 795 +60 +38

817 10. SBI 790 2007/02/03 802 +10 +12

800

During the fiscal year 2006/07 five companies gain on ex-dividend date whereas

almost all the companies gain after ex-dividend date expect HBL lost Rs. 2 after ex-

dividend date. The largest gainer was SCBNL and NIBL with the increase of Rs.

115 and Rs. 265 before ex-dividend and after the ex-dividend date respectively.

62

4.3.5 For the Fiscal Year 2007/08

Table No. 4.12 Price Effect after Cash Dividend Payment on Fiscal Year 2007/08 (In NPR)

S No

Company Name MPS Before

Ex-dividend Date

MPS After

Price Change On Ex-dividend

Date After Ex-

dividend Date 1. EBL 2973 10/7/2007 2729

-18 -244

2955 2. HBL 2165

31-Dec-07 1973

-111 -192

2054 3. NABIL 4770

7-Oct-07 4285 -139 -485

4631 4. NIBL 1993 8-Nov-07 2311

127 -191

2120 5. SBI 1635

22-Feb-08 1286 -435 318

1200 6.

SBBL 1052

11-Jan-08 1199

73 147

1125 7. AFC 883

13-Jan-08 720 -243 -163

640 8. CHPCL 1063 10-Feb-08 1216

88 153

1151 9. NLIC 1644 24-Jun-08 1698

-84 54

1560 During the fiscal year 2007/08 four companies MPS decreased on and after ex-

dividend date. NIBL, SBBL and CHPCL companies MPS increased on ex-dividend

date and four companies MPS increased after ex-dividend date. The largest gainer

was the shares of NIBL with the increase of Rs. 127 on ex-dividend date and SBI

with the increase of Rs. 318 after ex-dividend date. SBI and NABIL lose more on

and after ex-dividend of Rs. 435 and Rs. 485 respectively.

4.4 Test of Hypothesis Under this topic, an effort has been made to test the significance regarding the

parameter of the population based on drawn from the population. Generally, the

following steps are followed for the test of hypothesis.

i. Formulation of Hypothesis

63

ii. Computation of test statistic

iii. Fixing the level of significance

iv. Finding the criteria region

v. Deciding the two tailed or one tailed test

vi. Making decision

4.4.1 Test of Hypothesis on Cash Dividend Payments of Commercial

Banks

Null Hypothesis (Ho): 7654321 µµµµµµµ =−===== i.e. there is no significant difference among mean cash dividend payment of commercial banks i.e. cash dividend payment of commercial banks are homogenous.

Alternative Hypothesis (H1): 7654321 µµµµµµµ ≠≠≠≠≠≠ i.e. there is a significant difference among mean cash dividend payment of commercial banks. Note: For detail calculation see Annex-III

Table No. 4.13 One-way AVOVA Table for Cash Dividend Payment of Commercial Banks

Source of Variation

Sum of Square d.f. Mean Square F ratio= MSEMSC

Between samples SSC= 49307.19

k-1= 7-1=6

MSC=6

49307.19

=8217.86

F=MSEMSC

=54.13686.8217

Within samples SSW= 3823.05

n-k= 35-7=28

MSE=28

05.3823

=136.54 Total TSS=53130.24

n-1=34 F=60.19

Critical Value: The tabulated value of F at 5% level of significance for 6 and 34

d.f. is 2.42.

64

Decision: Since calculated F is greater than tabulated value, the null hypothesis, Ho

is rejected and hence the alternative hypothesis, H1 is accepted. Therefore, we

conclude that there is a significant difference among mean cash dividend payment

of commercial banks.

4.4.2 Test of Hypothesis on Cash Dividend Payments of Development Banks

Null Hypothesis (Ho): 4321 µµµµ === i.e. there is no significant difference among mean cash dividend payment of development banks i.e. cash dividend payment of CBs are homogenous.

Alternative Hypothesis (H1): 4321 µµµµ ≠≠≠ i.e. there is a significant difference among mean cash dividend payment of development banks.

Note: For detail calculation see Annex-IV

Table No. 4.4 One-way AVOVA Table for Cash Dividend Payment of Development Banks

Source of Variation

Sum of Square d.f. Mean Square F ratio= MSEMSC

Between samples SSC= 200.84

k-1= 4-1=3

MSC=3

84.200

=66.95

F=MSEMSC

=66.4495.66

Within samples SSW= 714.60

n-k= 20-4=16

MSE=16

60.714

=44.66 Total TSS=915.44 n-1=19 F=1.50

Critical Value: The tabulated value of F at 5% level of significance for 3 and 19

d.f. is 3.13.

65

Decision: Since calculated F is lesser than tabulated value, the null hypothesis, Ho is

accepted and hence the alternative hypothesis, H1 is rejected. Therefore, we

conclude that there is no significant difference among mean cash dividend payment

of development banks i.e. cash dividend payment of development banks are

homogenous.

4.4.3 Test of Hypothesis on Cash Dividend Payments of Manufacturing

and Processing Companies

Null Hypothesis (Ho): 21 µµ = i.e. there is no significant difference among mean cash

dividend payment of manufacturing and processing companies i.e. cash dividend

payment of manufacturing and processing companies are homogenous.

Alternative Hypothesis (H1): 21 µµ ≠ i.e. there is significant difference among mean

cash dividend payment of manufacturing and processing companies i.e. cash

dividend payment of manufacturing and processing companies are not homogenous.

Note: For detail calculation see Annex-V

Table No. 4.15 One-way AVOVA Table for Cash Dividend Payment of Manufacturing and

Processing Companies

Source of Variation

Sum of Square d.f. Mean Square F ratio= MSEMSC

Between samples SSC=119902.50

k-1= 2-1=1

MSC=1

5.119902

=119902.50

F =MSEMSC

=75.846850.119902

Within samples SSW=67750

n-k= 10-2=8

MSE=8

67750

=8468.75 Total TSS=187652.50

n-1=9 F=14.16

Critical Value: The tabulated value of F at 5% level of significance for 1 and 8 d.f.

is 5.32

66

Decision: Since calculated F is greater than tabulated value, the null hypothesis, Ho

is rejected and hence the alternative hypothesis, H1 is accepted. Therefore, we

conclude that there is significant difference among mean cash dividend payment of

manufacturing and processing companies i.e. cash dividend payment of

manufacturing and processing companies are not homogenous.

4.5 Major Findings

1. The no. of cash dividend paying companies listed at NEPSE is seen almost the

same in context of total listed companies since last five fiscal year except

2004/05 in which it comprise of 20.80 percent of total listed companies.

2. There is the low degree of positive correlation between the total number of

listed companies and the number of cash dividend paying listed companies.

3. Large amount of cash dividend paying “A” class commercial bank of the

sample is seen SCBNL. The average payment of cash dividend by SCBNL

was Rs.110 per share. Being an “A” class financial institution SBI has not

been able to declare cash dividend to its shareholders. EBL, NIBL, HBL and

DCBL have been seen declaring and paying the cash dividend regularly to its

shareholders.

4. Development bank’s payment of cash dividend is almost insignificant. Only

CBBL and NUBL has been seen paying cash dividend in two fiscal year

2005/06 and 2006/07 with an average of Rs. 1.80 and Rs. 8 per share.

5. The cash dividend payment condition of the insurance companies has not been

seen in sample. None of the insurance companies listed as “A” class financial

institutions also have not declared cash dividend since past five fiscal year

except some of the insurance companies declared bonus share.

67

6. Most of the finance company is not being capable of declaring cash dividend

to their shareholders. Only AFC has been paying cash dividend regularly, with

an average of Rs. 3.87 in the past five fiscal year.

7. Under manufacturing and processing companies, only one company has been

included under the “A” class financial institution i.e. ULN. The company has

been paying the cash dividend regularly. Similarly, the amount of the cash

dividend paid is also high than any other companies included in the sample.

BNL is not included under the “A” class financial institution but we have

taken as a sample from the manufacturing and processing companies for study.

It has not been able to distribute cash dividend with good amount being one of

the renowned multinational soft drink company. It has been paying cash

dividend with an average of Rs. 4 in the past five fiscal year.

8. Under the other company only three companies are listed. They are National

Hydropower Company Ltd., Butwal Hydropower Company Ltd. and Chilime

Hydropower Company Ltd. CHPCL has been categorized as “A” class

financial institution and it has declared Rs.35 as cash dividend and Rs. 30 as

interim dividend in the fiscal year 2006/07 and 2007/08 respectively. But in

earlier fiscal year it has not been able to declare cash dividend.

9. None of the institutions under the hotel and trading have distributed cash

dividend to its shareholders since last five fiscal year except Soaltee Hotel Ltd.

in fiscal year 2007/08 which pays Rs. 10 cash dividend per share.

10. Under ex-dividend test, the MPS of the nineteen companies who declared the

cash dividend has increased on the ex-dividend date and fifteen companies

after the ex-dividend date during the sample fiscal year. Similarly, the MPS of

the twenty companies who declared the cash dividend has declined on the ex-

dividend date and twenty three companies after the ex-dividend date.

11. Principally, the MPS of the shares should decline on the ex-dividend date and

after this date after the declaration of the cash dividend by the companies. But

68

from the above data we see that the MPS of UNL, DCBL and NIBL increased

by Rs.13, Rs.10 and Rs.8 respectively in fiscal year 2004/05.

12. Similar is the situation in the fiscal year 2005/06. The MPS of majority of the

cash dividend declaring companies is seen increased on ex-dividend date and

decreased after ex-dividend date.

13. During the fiscal year 2006/07, MPS of majority of the cash dividend

declaring companies is seen increased after ex-dividend date. The largest

gainer was the shares of NIBL with the increase of Rs. after the ex-dividend

date.

14. Since calculated F is greater than tabulated value, the null hypothesis, Ho is

rejected and hence the alternative hypothesis, H1 is accepted. Thus, we

conclude that there is a significant difference among mean cash dividend

payment of commercial banks and manufacturing and processing companies

whereas there is no significant difference among mean cash dividend payment

of development.

15. Since calculated value of t is of t is less than tabulated value of t, the null

hypothesis is accepted i.e. There is no significant difference between the

average MPS before and after the cash dividend payment of commercial

banks, development banks and finance companies.

69

Chapter 5 Summary and Conclusions

5.1 Summary of Findings After the restoration of democracy in 1990 A.D., Nepal has implemented liberal

economic policy. As a result, many more companies are established in different

sectors such as industrial, tourism, transportation, trade and mostly in financial

sector who contribute to build up economy of the country. Nepal is a country trying

to develop its economy through global trend and cooperation with developed

countries.

Shareholders make investment in equity capital with the expectation of making

earning in the form of dividend or capital gains. High payout satisfies the dividend

need whereas increase in market price of stock increases capital gain. Therefore,

firm should make a proper balance between dividends and retained earning.

Dividend distribution is the very important factor to any organization for effective

goal achievement to satisfy the shareholders. Dividends are decided upon and

declared by board of directors. A firm’s profits after-tax can either be used for

dividends payment or retained in the firm to increase shareholders' fund. This may

involve comparing the cost of paying dividend with the cost of retaining earnings.

Actually, paying dividend to shareholders is an effective way to attract new

investors to invest in shares. Due to decision of earnings of a company between

dividends payout and retention of earnings of a company between dividend pay out

and retention of earnings, its effect on market value of shares is a crucial question.

So, a wise policy should be maintained between shareholders’ interest and

corporate. The funds sometimes could not be used in case of lack of investment

opportunities. In such a situation distribution of dividend to shareholders is taken as

70

the best because shareholders may have investment opportunities to invest

elsewhere.

In Nepal there is more practice of cash dividend and stock dividend. The payment of

cash dividend by the financial institutions especially by banks is seen well than

other sectors.

Thus, the study attempts to determine the impact of cash dividend on stock price.

For this whole purpose different descriptive, financial and statistical analysis was

done using various methodologies.

5.2 Conclusions Different types of dividend are paid by the companies operating all over the world.

They may be in different forms and basis. The main reason of the dividend payment

is to provide the benefit to the shareholders of the company and to make them they

are the part of the company. In Nepal, there is a practice of providing either stock

dividend or cash dividend by the companies to their shareholders.

From the study we find out that mainly the commercial banks of the Nepal are

regular paying dividend. Being an “A” class financial institution, the majority

companies under the development banks, financial institutions and insurance

companies have not been able to pay dividend to its shareholders. Similarly, from

the CV calculation also we saw that the companies paying the cash dividend are not

paying consistently.

Under the empirical testing it has been proved that ex-day stock price tend to fall by

significantly less than the dividend. They interpret this result as consistent with a

clientele effect where investors in high tax brackets show a preference for capital

gains over dividends and vice versa. Another study examining the ex-dividend day

71

behavior of American Telephone and Telegraph stock for a time series of 43

consecutive dividends has found that the average price change from the cum-

dividend day to the ex-dividend day was $2.16, or about 4 percent less than the

$2.25 dividend.

But in Nepalese perspective the MPS of certain financial institutions is seen

increased heavily on and after ex-dividend date.

From Karl Pearson’ correlation analysis we found, there is a very low degree of

positive correlation between total listed companies and cash dividend paying

companies. We have also found that the most of the companies are paying cash

dividend and bonus share.

From the hypothesis calculation, we found there is a significant difference among

mean cash dividend payment of commercial bank and manufacturing and processing

companies i.e. i.e. cash dividend payment commercial banks and of manufacturing

and processing companies are not homogenous and there is no significant difference

among mean cash dividend payment of development banks i.e. cash dividend

payment of development banks are homogenous.

This study also concludes that there is no significant difference between the average

MPS before and after the cash dividend payment of commercial banks, development

banks and finance company.

5.3 Recommendations On the basis of findings the following recommendation is made for the further

applications of dividend policy regarding its impact on the stock prices:

1. Shareholders should be given an option to choose between stock dividend

and cash dividend instead of declaring stock or cash dividend arbitrary. For

72

this, dividend declaration should be proposed to the AGM of shareholders

for approval.

2. The legal rules and regulation must be in favor of investors to exercise the

dividend practice and to protect the shareholders right.

3. The NEPSE and SEBON should properly handle, guide and inform the

shareholders and the related companies about the market price increase or

decrease from the impact of dividend declaration.

4. The investors should be careful in investing in the stock of development

banks, insurance companies, hotel and other sector on the basis of cash

dividend.

5. Each and every company should provide the information regarding the

activities and performance, so that investors can analyze the situation and

invest their money in the best company.

6. Having seen the history of dividend paying companies, it is seen that the net

profit after tax is the main base for distributing the dividend. Thus, it is

suggested that investor who want to purchase the equity share and

immediate return should invest on the share of high profit earning

companies.

7. The investor should also think of investing in the hydropower sector for the

investment portfolio diversification. As Nepal has a huge potentiality in

generation of the hydropower, there is a good future for the better

performance.

8. As per the study it has been seen that there is no significant difference

between the average market price before and after the cash dividend

payment, therefore it suggested to investors not to invest in the AGM period

only because of dividend.

REFERENCES Adhikari, K. K. (2063). “The Comparative Study of Dividend Policy and Practices

Commercial Banks in Nepal”. Kathmandu: Shanker Dev Campus. Bhattari, B. H. (2052). “Dividend Decision & Its Impact on Stock

Valuation”. Kathmandu: Shanker Dev Campus. Bista, S. (2062). “Dividend Policy and Practices in Nepal: A Comparative

Study of Listed Joint Venture Commercial Banks and Manufacturing Companies”. Master Degree Thesis, Shanker Dev Campus, Kathmandu.

Bhattarai, R., (2006). Investment- Theory and Practice. Kathmandu: Buddha

Academic Publishers & Distributors Pvt. Ltd.

Chandra, P. (1999). Financial Management. New Delhi: Tata McGraw-Hill Publishing Co. Ltd.

Dasilasa, Apostolos (2007). “The ex-dividend day stock price anomaly: evidence from Greece.”

Fama, E .F. & Babiak, H. (1968). “Dividend policy: an empirical analysis.”

Journal of American Statistical Association, 63, pp. 1132-1161.

Foong, S. S., Zakaria, N. B. & Tan, H. B. (2007). “Firm performance and dividend related factors: the case of Malaysia.” Labuan Bulletin of international business & finance. Vol. 5, pp. 97-111.

Gitmen, L. J. (2000). Principles of Managerial Finance. New Delhi: Pearson

Education, Inc.

Joshi, P. R., (2001), Research Methodology. Kathmandu: Buddha Academic Publisher & Distributor Pvt. Ltd.

Pandey, I.M. (2002). Financial Management. New Delhi: Vikas Publishing House Pvt. Ltd. Uddin, Md. H. (2003). “Effect of Dividend Announcement on Shareholders’

Value: Evidence from Dhaka Stock Exchange.”

Van Horne, J. C. (2005). Financial Management and Policy. New Delhi: Person Education, Inc.

Weston, F. J. & Copeland, T. E. (2001). Managerial Finance. New York: The Dryden Press.

Wolff, H. K. & Pant, P. R. (2005). Social Science Research and Thesis Writing. Kathmandu: Buddha Academic Enterprises Pvt. Ltd.

Appendix-I

Karl Pearson’s correlation coefficient (r)

Correlation Coefficient Between Total Listed Companies and Cash Dividend Paying Listed Companies

F/Y Total listed Companies

(X)

Total Cash Dividend paying listed companies(Y)

x=X- X y=Y- Y 2x 2y xy

2003/04 114 32 -16.20 -3 1024 9 48.60 2004/05 125 26 -5.20 -9 676 81 46.80 2005/06 135 37 4.80 2 1369 4 9.6 2006/07 135 39 4.80 4 1521 16 19.20 2007/08 142 41 11.80 6 1681 36 70.80

N=5 ∑X =651 ∑Y =175 ∑ x =0 ∑ y =0 ∑ 2x =6271 ∑ 2y =146 ∑ xy =195

20.1305

651=== ∑

nx

X

355

175=== ∑

ny

Y

203.008.1219.79

1951466271

19522

=×

===∴∑∑

∑yx

xyr

Finding: There is a very low degree of positive correlation between total listed companies and cash dividend

paying companies.

Appendix-II

Dividend Announcement Name of Listed Company Dividend in (%)

Fiscal Year 2003/04 2004/05 2005/06 2006/07 2007/08 COMMERCIAL BANK

Nabil Bank Ltd. Cash Dividend 50

Cash Dividend 65

Cash Dividend 70 Cash Dividend 85

Cash Dividend 100 Bonus Share 40

Nepal Investment Bank Ltd. Cash Dividend 20

Cash Dividend 15

Cash Dividend 12.58

Cash Dividend 20 Bonus Share 35.46

Cash Dividend 5 Bonus Share 25

Standard Chartered Bank (Nepal) Ltd.

Cash Dividend 110

Cash Dividend 110

Cash Dividend 120 Cash Dividend 130 Bonus Share 10

Cash Dividend 80 Bonus Share 50

Himalayan Bank Ltd. Cash Dividend 1.32

- Cash Dividend 11.5 Bonus Share 20

Cash Dividend 30 Bonus Share 5

Cash Dividend 15 Bonus Share 25

Nepal SBI Bank Ltd. Cash Dividend 8

- - Cash Dividend 5

Cash Dividend 10 Bonus Share 35

Development Credit Bank Ltd. Cash Dividend 10

Cash Dividend 10

Cash Dividend 12

Cash Dividend 12

Bonus Share 12

Everest Bank Ltd. Cash Dividend 20

Cash Dividend 20

Cash Dividend 20

Cash Dividend 25

Cash Dividend 10 Bonus Share 30

DEVELOPMENT BANK

Chimeki Bikas Bank Ltd. - - Cash Dividend 10 Cash Dividend 30 Bonus Share 70 Sanima Bikas Bank Ltd. - - - - Bonus Share 20 Sahayogi Bikash Bank Ltd. - - - - Cash Dividend 3.50 Nirdhan Utthan Bank Ltd. - - Cash Dividend 4

Bonus Share 10 Cash Dividend 5 Bonus Share 20

Bonus Share 10

FINANCE COMPANY

Annapurna Finance Co. Ltd. Cash Dividend 12 Cash Dividend 2.632 Bonus Share 50

Cash Dividend 3.158

Bonus Share 60

Cash Dividend 0.53 Bonus Share 10

Cash Dividend 1.05 Bonus Share 20

Bhajuratna Finance and Saving Co. Ltd.

- - - - Cash Dividend 0.5 Bonus Share 10

Everest Finance Co. Ltd. - - - - -

INSURANCE COMPANY

Himalayan General Insurance Co. Ltd.

- - - Bonus Share 110

Everest Insurance Co. Ltd. Bonus Share 100 - Bonus Share 50 - Bonus Share 12.50 Nepal Life Insurance Co. Ltd. - - - Bonus Share 20 - United Insurance Co. Ltd. - - Bonus Share 20

HOTEL

Soaltee Hotels Ltd. - - Cash Dividend 10 Taragaon Regency Hotel Ltd. - - - Oriental Hotel Ltd. - - - Yak and Yeti Hotel Ltd. - - -

MANUFACTURING AND PROCESSING COMPANY

Bottlers Nepal Ltd. (Balaju) Cash Dividend 5 - - - - Bottlers Nepal Ltd. (Terai) Cash Dividend 10 Cash Dividend 5 - - - Unilever Nepal Ltd. Cash Dividend 90 Cash Dividend 100 Cash Dividend 400 Cash Dividend 250 Cash Dividend 275

TRADING COMPANY Salt Trading Corporation Ltd. Cash Dividend 20 Cash Dividend 20 Cash Dividend 20 Cash Dividend 20 Cash Dividend 20 Bishal Bazar Co. Ltd. Cash Dividend 75 Cash Dividend 85 Cash Dividend 90 Interim Dividend

100 Cash Dividend 20 Bonus Share 80

OTHERS National Hydro Power Co. - - - - Cash Dividend 6 Butwal Power Co. Ltd. - - - Cash Dividend 30 Cash Dividend 25 Chilime Hydro power Co. - - - Cash Dividend 35 Cash Dividend 30

Source: Annual Report of SEBON

Appendix-III

Test of Hypothesis on Cash Dividend Payments of Commercial Banks

Null Hypothesis (Ho): 7654321 µµµµµµµ =−===== i.e. there is no significant difference among mean cash dividend payment of commercial banks i.e. cash dividend payment of commercial banks are homogenous.

Alternative Hypothesis (H1): 7654321 µµµµµµµ ≠≠≠≠≠≠ i.e. there is a significant difference among mean cash dividend payment of commercial banks

1X 2X 3X 4X 5X6X 7X 2

11

X 22X 2

3X 24X 2

5X 26X 2

7X

20 50 20 110 1.32 8 10 400 2500 400 12100 1.74 64 100 20 65 15 110 0 0 10 400 4225 225 12100 0 0 100 20 70 12.58 120 11.50 0 12 400 4900 158.26 14400 132.25 0 144 25 85 20 130 30 5 12 625 7225 400 16900 900 25 144 10 100 5 80 15 10 12 100 10000 25 6400 225 100 144

∑ 1X = 95

∑ 2X = 370

∑ 3X = 72.58

∑ 4X = 550

∑ 5X =57.82

∑ 6X =24

∑ 7X =56

∑ 211

X =

1925

∑ 22X =

28850 ∑ 2

3X =

1208.26 ∑ 2

4X =61900

∑ 25X =

1258.99 ∑ 2

6X =189

∑ 27X =

632

T= ∑∑∑∑∑∑∑ ++++++ 7654321 XXXXXXX =95+370+72.58+550+57.58+24+56=1224.40

C.F.=35

)4.1224(NT 22

= =42833.01

T.S.S.= .F.CXXXXXXX 27

26

25

24

23

22

211 −++++++ ∑ ∑∑∑∑∑∑

=1925+28850+1208.26+61900+1258.99+189+632-42833.01 =53130.24

S.S.C.= .F.Cn

)X(

n

)X(

n

)X(

n

)X(

n

)X(

n

)X(

n

)X(

7

27

6

26

5

25

4

24

3

23

2

22

1

21 −+++++ ∑∑∑∑∑∑∑

= 01.428335)56(

5)24(

5)82.57(

5)550(

5)58.72(

5)370(

5)95( 2222222

−++++++

=49307.19 S.S.W.= T.S.S.-S.S.C.= 53130.24 - 49307.19= 3823.05

Appendix-IV

Test of Hypothesis on Cash Dividend Payments of Development Banks Null Hypothesis (Ho): 4321 µµµµ === i.e. there is no significant difference among mean cash dividend payment of development banks i.e. cash dividend payment of CBs are homogenous.

Alternative Hypothesis (H1): 4321 µµµµ ≠≠≠ i.e. there is a significant difference among mean cash dividend payment of development banks.

1X 2X 3X 4X 211

X 22X 2

3X 24X

0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 4 10 0 0 16 100 0 0 5 30 0 0 25 900 0 0 0 0 3.5 0 0 0 12.25

∑ 1X = 0

∑ 2X = 9

∑ 3X = 40

∑ 4X = 3.5

∑ 211

X =

0 ∑ 2

2X = 41

∑ 23X =

1000 ∑ 2

4X = 12.25

T= ∑∑∑∑ +++ 4321 XXXX =0+9+40+3.5=52.50

C.F.=20

)50.52(NT 22

= =137.81

T.S.S.= ..24

23

22

211 FCXXXX −+++ ∑∑∑∑

=0+41+0+1000+12.25-137.81 =915.44

S.S.C.= ..)()()()(

4

24

3

23

2

22

1

21 FC

n

X

n

X

n

X

n

X−+++ ∑∑∑∑

= 81.1375

)5.3(5

)40(5)9(

5)0( 2222

−+++

=200.84 S.S.W.=T.S.S.-S.S.C.= 915.44-200.84=714.60

Appendix-V Test of Hypothesis on Cash Dividend Payments of Manufacturing and Processing Companies Null Hypothesis (Ho): 21 µµ = i.e. there is no significant difference among mean cash dividend payment of Mfg. and PCs i.e. cash dividend payment of CBs are homogenous. Alternative Hypothesis (H1): 21 µµ ≠ i.e. there is a significant difference among mean cash dividend payment of Mfg. and PCs.

1X 2X 2

11

X 22X

900 15 400 400 100 5 8100 225 400 0 10000 25 250 0 160000 0 275 0 62500 0 ∑ 1X = 1115

∑ 2X = 20

∑ 211

X =

316225 ∑ 2

2X = 250

T= ∑∑ + 21 XX =1115+20=1135

C.F.=10

)1135(NT 22

= =128822.50

T.S.S.= ..2

22

11FCXX −+∑∑

=3166225+250-128822.50

=187652.50

S.S.C.= .F.Cn

)X(n

)X(

2

22

1

21 −+ ∑∑

= 50.1288225

)20(5

)1115( 22−+

=119902.50 S.S.W.=T.S.S.-S.S.C.= 187652.50-119902.50=67750

Appendix-VI

Test of hypothesis on ex-dividend day test for the MPS of commercial banks

Null Hypothesis (Ho): yx µ=µ i.e. there is no significant difference between the average MPS before and after the cash dividend payment of commercial banks.

Alternative Hypothesis (H1): xµ > yµ (Right tailed test) i.e. the average MPS decrease after the payment cash dividend.

MPS Before Cash Dividend (x)

MPS After Cash Dividend (y)

d-x-y d2

152 157 -5 25 1763 1701 62 3844 445 442 3 9 803 798 5 25 995 662 333 110889 242 243 -1 2 687 682 5 25 1860 1839 21 441 201 211 -10 100 1259 1248 11 121 1152 1160 -8 64 2312 2320 -8 64 1447 1712 -265 70225 1328 1421 -93 8649 4285 4357 -72 5184 1303 1301 2 4 809 813 -4 16 790 802 -12 144 2973 2729 244 59536 2165 1973 192 36864 4770 4285 485 235225 1993 2311 -318 101124 1665 1286 379 143641 n=23 ∑d =946 ∑d 2=776220

41.1323

946n

dd ===∴ ∑

⎥⎦

⎤⎢⎣

⎡−

−=∴ ∑ ∑

n)d(

d1n

1 22

ds

⎥⎥⎦

⎤

⎢⎢⎣

⎡−

−= ∑ 23

)946(776220

1231 2

60.737310*221

=

= 183.07

n

dtd

cal s=∴

23183.07

13.41=

∴ tcal = 1.08

∴ Degree of freedom (d.f.) = n-1 = 23-1 = 22 ∴ Level of significance, α =0.05

Critical Value: The tabulated value of t atα =0.05 and 23 d.f. for right tailed test is 1.714. Decision: Since the calculated value of t is less than tabulated value of t, the null hypothesis is accepted i.e. There is no significant difference between the average MPS before and after the cash dividend payment of commercial banks.

Appendix-VII

Test of hypothesis on ex-dividend day test for the MPS of development banks and finance company

Null Hypothesis (Ho): yx µ=µ i.e. there is no significant difference between the average MPS before and after the cash dividend payment of development banks and finance company.

Alternative Hypothesis (H1): xµ > yµ (Right tailed test) i.e. the average MPS decrease after the payment cash dividend.

MPS Before Cash Dividend (x)

MPS After Cash Dividend (y)

d-x-y d2

102 124 -22 484 1052 1199 147 21609 417 350 67 4489 577 420 157 24649 883 720 163 26569 n=5 ∑d =218 ∑d 2=77800

60.435

218n

dd ===∴ ∑

⎥⎦

⎤⎢⎣

⎡−

−=∴ ∑ ∑

n)d(

d1n

1 22

ds

⎥⎥⎦

⎤

⎢⎢⎣

⎡−

−= ∑ 5

)60.43(77800

151 2

81.77419*41

=

= 139.12

n

dtd

cal s=∴

5139.12

60.43=

∴ tcal = 0.70

∴ degree of freedom (d.f.) = n-1 = 5-1 =4 ∴level of significance, α =0.05

Critical Value: The tabulated value of t atα =0.05 and 4 d.f. for right tailed test is 2.132. Decision: Since the calculated value of t is less than tabulated value of t, the null hypothesis is accepted and concluded that there is no significant difference between the average MPS before and after the cash dividend payment of development banks and finance company.

Appendix-VIII 1 When a stock pays higher dividend, the lesser the profit after-tax is being retained for

firm’s growth, thus affecting the expansion activities of the firms’ operations. On the other hand, if all of the profit after-tax is retained, this will cause dissatisfaction among investors and in a way encouraging them to invest in other stocks.

2 This statistic is known as the ex-dividend price drop ratio, drop-off ratio, premium, price

change to dividend drop ratio ∆ P/D etc. 3 DSE classifies the listed companies into A, B and Z categories. A category companies are

good stocks as their operating performance are assessed to be good and pay regular dividends, B-category companies are moderate companies whose operating performance are satisfactory and pay some dividends from time to time, and Z-category companies are those whose operating performance are not good and normally pay no dividend

S. No. Company NameEx‐dividend 

date

Average MPS Before Dividend

Average MPS After

Dividend1 EBL 21‐Dec‐03 17‐Dec‐03 18‐Dec‐03 19‐Dec‐03 22‐Dec‐03 23‐Dec‐03 24‐Dec‐03

444 445 445 444 441 442 442 445 4422 DCBL 12‐Nov‐03 5‐Nov‐03 6‐Nov‐03 7‐Nov‐03 13‐Nov‐03 14‐Nov‐03 15‐Nov‐03

161 151 150 155 158 157 156 152 1573 SCBNL 5‐Dec‐03 1‐Dec‐03 3‐Dec‐03 4‐Dec‐03 8‐Dec‐03 9‐Dec‐03 12‐Dec‐03

1775 1760 1756 1774 1771 1782 1550 1763 17014 AFC 21‐Dec‐03 12‐Dec‐03 15‐Dec‐03 19‐Dec‐03 9‐Jan‐04 23‐Jan‐04 25‐Jan‐04

410 420 420 410 350 350 350 417 3505 NABIL 4‐Jan‐04 30‐Dec‐03 31‐Dec‐03 2‐Feb‐04 5‐Feb‐04 7‐Feb‐04 7‐Feb‐04

800 810 800 800 800 800 795 803 7986 HBL 21‐Mar‐04 24‐Feb‐04 26‐Feb‐04 27‐Feb‐04 26‐Mar‐04 5‐Apr‐04 6‐Apr‐04

990 994 997 994 630 661 694 995 6627 SBI 28‐Mar‐04 15‐Mar‐04 19‐Mar‐04 26‐Mar‐04 1‐Apr‐04 2‐Apr‐04 5‐Apr‐04

241 245 240 241 240 245 245 242 243

S. No. Company NameEx‐dividend 

date

Average MPS Before Dividend

Average MPS After

Dividend1 EBL 31‐Oct‐04 26‐Oct‐04 27‐Oct‐04 28‐Oct‐04 1‐Nov‐04 2‐Nov‐04 3‐Nov‐04

685 690 685 685 685 680 680 687 6822 UNL 17‐Dec‐04 18‐Nov‐04 26‐Nov‐04 16‐Dec‐04 23‐Dec‐04 27‐Dec‐04 15‐Jan‐05

1500 1510 1450 1500 1500 1500 1500 1487 15003 SCBNL 2‐Dec‐04 29‐Nov‐04 30‐Nov‐04 1‐Dec‐04 3‐Dec‐04 4‐Dec‐04 5‐Dec‐04

1830 1889 1860 1830 1840 1840 1838 1860 18394 DCBL 18‐Dec‐04 10‐Dec‐04 14‐Dec‐04 17‐Dec‐04 20‐Dec‐04 21‐Dec‐04 22‐Dec‐04

208 198 198 208 212 210 212 201 2115 NABIL 22‐Dec‐04 17‐Dec‐04 20‐Dec‐04 21‐Dec‐04 23‐Dec‐04 24‐Dec‐04 29‐Dec‐04

1230 1230 1266 1280 1260 1270 1215 1259 12486 NIBL 25‐Dec‐04 22‐Dec‐04 23‐Dec‐04 24‐Dec‐04 27‐Dec‐04 28‐Dec‐04 29‐Dec‐04

Average MPS calculation for ex-dividend test for fiscal year 2003/04

APPENDIX IX

Average MPS calculation for ex-dividend test for fiscal year 2004/05

1155 1147 1155 1155 1163 1162 1154 1152 1160

S. No. Company NameEx‐dividend 

date

Average MPS Before Dividend

Average MPS After

Dividend1 UNL 9‐Sep‐05 6‐Sep‐05 7‐Sep‐05 8‐Sep‐05 23‐Nov‐05 24‐Nov‐05 29‐Nov‐05

2200 2140 2200 2200 1800 1885 1850 2180 18452 SCBNL 26‐Oct‐05 9‐Oct‐05 23‐Oct‐05 25‐Oct‐05 27‐Oct‐05 30‐Oct‐05 7‐Nov‐05

2430 2370 2400 2405 2446 2472 2200 2392 23733 DCBL 7‐Oct‐07 2‐Oct‐07 3‐Oct‐07 4‐Oct‐07 8‐Oct‐07 9‐Oct‐07 10‐Oct‐07

265 255 255 260 261 261 248 257 2574 NABIL 30‐Nov‐05 24‐Nov‐05 27‐Nov‐05 29‐Nov‐05 1‐Dec‐05 6‐Dec‐05 7‐Dec‐05

1650 1660 1660 1660 1700 1631 1605 1660 16455 NIBL 14‐Dec‐05 11‐Dec‐05 12‐Dec‐05 13‐Dec‐05 18‐Dec‐05 19‐Dec‐05 20‐Dec‐05

785 800 790 785 788 790 770 792 7836 HBL 16‐Dec‐05 13‐Dec‐05 14‐Dec‐05 15‐Dec‐05 18‐Dec‐05 19‐Dec‐05 20‐Dec‐05

1140 1126 1140 1140 1135 1123 1100 1135 11197 AFC 26‐Dec‐05 20‐Dec‐05 21‐Dec‐05 20‐Dec‐05 20‐Feb‐06 26‐Mar‐06 4‐Apr‐06

627 563 570 598 400 420 441 577 420

S. No. Company NameEx‐dividend 

date

Average MPS Before Dividend

Average MPS After

Dividend1 NABIL 22‐Oct‐06 17‐Oct‐06 18‐Oct‐06 18‐Oct‐06 26‐Oct‐06 31‐Oct‐06 1‐Nov‐06

2340 2295 2300 2340 2340 2300 2320 2312 23202 SBI 3‐Feb‐07 29‐Jan‐07 31‐Jan‐07 1‐Feb‐07 4‐Feb‐07 5‐Feb‐07 6‐Feb‐07

800 785 785 800 800 805 800 790 8023 HBL 15‐Dec‐06 12‐Dec‐06 13‐Dec‐06 14‐Dec‐06 17‐Dec‐06 18‐Dec‐06 19‐Dec‐06

1300 1305 1305 1300 1300 1301 1303 1303 13014 SCBNL 8‐Nov‐06 5‐Nov‐06 6‐Nov‐06 7‐Nov‐06 9‐Nov‐06 12‐Nov‐06 13‐Nov‐06

4400 4255 4300 4300 4440 4550 4081 4285 43575 EBL 31‐Oct‐06 26‐Oct‐06 29‐Oct‐06 30‐Oct‐06 1‐Nov‐06 2‐Nov‐06 6‐Nov‐06

1345 1300 1340 1345 1365 1440 1458 1328 1421

Average MPS calculation for ex-dividend test for fiscal year 2005/06

Average MPS calculation for ex-dividend test for fiscal year 2006/07

6 NIBL 26‐Oct‐06 17‐Oct‐06 18‐Oct‐06 19‐Oct‐06 29‐Oct‐06 30‐Oct‐06 31‐Oct‐061435 1456 1450 1435 1414 1423 2300 1447 1712

7 DCBL 25‐Dec‐06 20‐Dec‐06 21‐Dec‐06 24‐Dec‐06 26‐Dec‐06 27‐Dec‐06 28‐Dec‐06805 810 801 815 805 816 819 809 813

8 UNL 5‐Sep‐06 24‐Aug‐06 27‐Aug‐06 30‐Aug‐06 7‐Sep‐06 18‐Sep‐06 12‐Oct‐062810 2810 2850 2810 2900 2750 2850 2823 2833

9 CBBL 26‐Dec‐06 2‐Apr‐06 3‐Apr‐06 27‐Nov‐08 25‐Jun‐08 29‐Jun‐08 30‐Jun‐08105 100 100 105 120 120 132 102 124

10 CHPCL 8‐Jan‐07 3‐Jan‐07 4‐Jan‐07 7‐Jan‐07 9‐Jan‐07 10‐Jan‐07 11‐Jan‐07817 735 745 790 810 775 800 757 795

S. No. Company NameEx‐dividend 

date

Average MPS Before Dividend

Average MPS After

Dividend1 EBL 7‐Oct‐07 2‐Oct‐07 3‐Oct‐07 4‐Oct‐07 8‐Oct‐07 9‐Oct‐07 10‐Oct‐07

2955 2970 2950 3000 2587 2849 2750 2973 27292 HBL 31‐Dec‐07 25‐Dec‐07 26‐Dec‐07 27‐Dec‐07 9‐Jan‐08 10‐Jan‐08 12‐Jan‐08

2054 2220 2180 2095 2054 1985 1880 2165 19733 NABIL 7‐Oct‐07 2‐Oct‐07 3‐Oct‐07 4‐Oct‐07 8‐Oct‐07 9‐Oct‐07 10‐Oct‐07

4631 4800 4800 4710 4450 4255 4150 4770 42854 NIBL 8‐Nov‐07 5‐Nov‐07 6‐Nov‐07 7‐Nov‐07 12‐Nov‐07 13‐Nov‐07 14‐Nov‐07

2120 1940 2000 2040 2162 2280 2490 1993 23115 SBI 22‐Feb‐08 16‐Feb‐08 17‐Feb‐08 19‐Feb‐08 25‐Feb‐08 27‐Feb‐08 28‐Feb‐08

1200 1850 1230 1825 1275 1301 1282 1635 12866 SBBL 11‐Jan‐08 8‐Jan‐08 9‐Jan‐08 10‐Jan‐08 12‐Jan‐08 13‐Jan‐08 14‐Jan‐08

1125 1020 1018 1119 1332 1175 1090 1052 11997 AFC 13‐Jan‐08 6‐Jan‐08 11‐Jan‐08 12‐Jan‐08 21‐Jan‐08 22‐Jan‐08 31‐Jan‐08

640 610 650 1390 684 710 767 883 7208 CHCPL 10‐Feb‐08 3‐Feb‐08 4‐Feb‐08 5‐Feb‐08 12‐Feb‐08 14‐Feb‐08 16‐Feb‐08

1151 1078 1036 1076 1145 1335 1167 1063 12169 NLIC 24‐Jun‐08 4‐Jun‐08 5‐Jun‐08 9‐Jun‐08 25‐Jun‐08 29‐Jun‐08 30‐Jun‐08

1560 1601 1633 1698 1825 1620 1650 1644 1698

Average MPS calculation for ex-dividend test for fiscal year 2007/08