i

Term paper
on
“An appraisal of dividend policy of Deshbandhu Polymer Limited”
FIN 435: Managerial Finance
Section No. 02

ii
 Letter of Transmittal
22nd March 2017
Dr. Tanbir Ahmed Chowdhury
Professor (Dean & Faculty)
Department of Business Administration
East West University
Dhaka-1212

Subject: Submission of the report.

Dear Sir,
It is my pleasure to submit this report entitled “An appraisal of dividend policy of
Deshbandhu Polymer Limited” which was assigned to us as a partial fulfillment of
Managerial Finance course requirements.
We have tried our level best to make an enriched report and now we are glad to submit you
this for better judgment. The writing of this report was a great experience as it provided us
with exposure to the real life and practical experience.
Thank you for your guidance and constant supervision to fulfill this report. If you need
further classification please call on us.

iii
 Acknowledgement
We would like to express our gratitude and indebtedness to our honorable faculty Mr. Tanvir
Ahmed Chawdury, Professor, Department of Business Administration, East West University.

With his inexhaustible guidence, valuable advice, continuous inspiration constructive

critisism and generosity he helped us to carry out this assignment successfully. We would
also like to express our gratitude to the journalists and web developers who creates journals
and websites which helped us to gather all the necessary information. We also like to thanked
those people who give their valuable comments and helped us to do a successfull analysis on
Deshbandhu Polymer Limited.

Finally, we would like to thank all group members that directly or indirectly helped us to
provide and accumulate all the necessary information for the accomplishment of this
assignment.

iv
 EXECUTIVE SUMMARY
Appraise the dividend policy, identify the problems of its dividend policy, and suggest
remedial action for improvement of the dividend policy of Deshbandhu Polymer. Here, we
have the data from 2011-2015. We have net income, dividend, EPS, retained earnings.
Growth in net income is even more important than sales because net income tells the investor
how much money is left over after all of the operating costs are subtracted from sales.

Growth in net income is even more important than sales because net income tells the investor
how much money is left over after all of the operating costs are subtracted from sales. From
the above table, Deshbandhu Polymer Limited faces a significant net income in the year
2011, 2012 and 2014. But the company faces low growth in net income in the year 2013 and
2015.

We can see that the company decreases the retained earnings and increase its dividend up to
the year 2013, because the company faces a positive growth rate in its net earnings. But in
2013 Deshbandhu Polymer Limited face a negative growth rate in their net earnings. So they
decrease their dividend and increase the percentage of retained earning up to 89.69%.

In 2013 the company declared cash dividend. Then in the following years and the previous
years the company didn’t declare any cash dividend because they don’t have enough profit to
give cash dividend and their growth of net income become negative in the following years.
The company may also be in growth stage that’s why they are giving less cash dividend
because they are relying heavily on internal sources of funds.

The company’s cash position is inadequate for paying out cash dividends. So they pay their
shareholders in stock dividend. In 2010 to 2013, the company gives stock dividend because
their growth rate of net income becomes negative. So by giving stock dividend the company
increases its liquidity. There is also a reason for giving stock dividend that is reduce the tax
expense from the income of common stockholders.

it can be said that Deshbandhu Polymer Limited had the only dividend payout ratio in 2013
that means the company paid 183.25% of its net income as dividends to the shareholder. No
dividend was paid on any other year due to cash constraint.

v
 Table of Content
Chapters Page No.

Chapter 1: Introduction…………………………………….. 01-05

1.1: An overview of dividend policy……………………… 01-04

1.2: Objectives of the study………………………………. 05-05

1.3: Scope & Methodology……………………………….. 05-05

1.4: Limitations of the study……………………………… 05-05

Chapter 2: Appraisal of Dividend Policy………………….. 06-19

2.1: An overview of the company………………………… 06-07

2.2: Appraisal of dividend practices of the company……… 08-19

Chapter 3: Findings & Conclusion……………………….. 20-22

3.1: Findings of the study……………………………… 20-20

3.2 Conclusion & Reference…………………………… 21-22

vi
 Chapter 1
Introduction

Overview of the Dividend Policy:

Dividends refer to that portion of a firm’s earnings which are paid out to the shareholders.

Dividend can be two types such as Cash dividend and Stock dividend. In cash dividend

shareholders get a certain percentage of cash of the net income whereas, a stock dividend is
the payment to existing owners of dividends in the form of stock.

A dividend policy is the policy a company uses to decide how much it will pay out to

Shareholders as dividends from retained earnings. It is a part of net income distributed among
the shareholders. Whether and what amount to pay as cash dividend is decided by the board
of directors in (AGM) Annual General Meeting. In the date of annual general meeting which
is commonly known as record date; the corporation declares the payment date on which
dividends will be paid to those shareholders who were registered in ex-dividend date.

In a corporation there are two types of shareholders.

 Common stock: Dividend is not fixed and fluctuates by the net income.
 Preferred stock: Dividend is fixed and mentioned when it is issued. Preferred stock
canbe classified in two types further.
 Cumulative preferred stock: Dividend payment is mandatory if company makes
profit. But if there is loss, on that year dividend won’t be paid. But in the next year,
company must pay the outstanding dividends if the company earns sufficient profit.
 Non-Cumulative preferred stock: Dividend payment is mandatory if company
makes profit. But if there is loss, dividend payment is not required for that year.

vii
Dividend theory has 2 types.
 Dividend irrelevance theory: Dividend irrelevance theory put forth by Metorn H.
Millar
& Franco Modigliani (M&M) that in a perfect world, the value of a firm is unaffected by
the distribution of dividends and is determined solely by the earning power and risk of its
assets and that the manner in which it splits its earnings stream between dividends and
internally retained funds does not affect this value.
There is no relationship between dividend and share price. Share price mostly depends on
basic earning power and risk of corporation. In this theory, shareholders are risk takers
and focused on long term investment. The informational content and Clientele effect is
considered in this theory.
 Dividend relevance theory: The theory Dividend relevance advanced by Gordon and
Lintner states that there is a direct relationship between a firm’s dividend policy and its
market value. Fundamentals to this proposition are their bird-in-the-hand argument,
which suggests that investors see current dividends as less risky than future dividends or
capital gains. That means investors are risk averse & attach less risk to current as
opposite to future dividends or capital gains.
Cash Dividend reduces investor uncertainty causing investors to discount the firm’s
earnings at a lower rate and it places a higher value on the firm’s stock. If dividends are
increased, investor uncertainty will decrease, lowering the required return and increasing
the value of the firm’s stock. Empirical studies fail to provide conclusive evidence in
support of dividend relevance argument. However, financial managers & stockholders
believe that dividends are relevant.

viii
Factors affecting dividend policy:

There are several factors affecting dividend policy which are Legal Constraints, Contractual
Constraints, Internal Constraints, Growth Prospects, Owner Considerations and Market
Considerations.
 Legal constraints: The Legal Constraints denotes an earnings requirement limiting
the
amount of dividends to the sum of the firm’s most present & past retained earnings is
sometimes imposed. However, the firm is not prohibited from paying more in dividends
than its current earnings.
Maximum dividend = Retained earnings + Net income of the year
 Internal constraints: Dividend may be constrained by internal factors which are
investment in working capital and investment in marketable securities. Internal
Constraints considers the firm’s ability to pay cash dividends is generally constrained by
the amount of excess cash available rather than the level of retained earnings which to
charge them.
 Contractual constraints: Dividend may be constrained by long term loans. Creditors
may impose restrictions on new debt, dividends and corporate salaries to protect the firm
from insolvency. Contractual Constraints considers the firm’s ability to pay cash
dividends are constrained by certain restrictive provisions in a loan agreement. These
Constraints prohibit the payment of cash dividends. Constraints on dividends help to
protect creditors from losses due to insolvency on the part of the firm.
 Growth Prospects: Growth Prospect focuses on the firm’s financial requirements are
directly related to the degree of assets expansion that is anticipated.
 Owner Considerations: Owner Considerations includes tax status of a firm’s
owners,
owner’s investment opportunities the potential dilution of ownership and prospects of
firm. Wealth of the firm’s owners reflected by the market price of share and market price
of share influenced by the dividend policy are stock holders prefer fixed or increasing
level of dividends as opposed to a fluctuating pattern of dividends.

ix
Types of Dividend Policy:
There are three types of dividend policy which companies follow.
1. Constant Payout Ratio: It means the payment of fixed percentage of earning as
dividend every year. This certain percentage of dividend will be distributed among the
shareholders every year. Net income may differ from year to year. If a net loss incurs
then no dividend will be paid.
2. Regular Dividend: In this type of dividend policy the investors get dividend at usual
rate. Here the investors are generally retired persons or weaker section of the society who
want to get regular income. This type of dividend payment can be maintained only if the
company has regular earning. If retained earnings are available certain percentage of
dividend will be distributed. Even if net loss incurs dividend will be paid by corporation.
It is considered as a positive signal among shareholders. It stabilizes the market value of
shares. It helps in giving regular income to the shareholders.
3. Low Regular and Extra Dividend: Here the company pays low regular dividend to the
shareholders. Sometimes extra dividend is paid. The company uses this practice due to
following reasons:
 Due to uncertain earning of the company.
 Due to lack of liquid resources.
 The company sometime afraid of giving regular dividend.

1.2 Origin of the report:

Our course instructor Prof. Dr.Tanbir Ahmed Chowdhury has authorized us the
report as the partial fulfillment of “Managerial Finance” course requirements. We are
assigned to make a report on “An Appraisal of Dividend Policy of Deshbandhu Polymer
Ltd” and complete a study that covers all important factors.

x
Objective of the report:
To describe and analyze a company’s dividend policy and how we can recommend for
improvement and so on -
 To present the principal activities of Deshbandhu Polymer LTD
 To appraise the dividend policy of Deshbandhu Polymer LTD
 To identify the problems of its dividend policy
 To suggest remedial action for improvement of the dividend policy

1.4 Scope & Methodology:

At first we got the report design and structure from our academic supervisor and moved
for the next steps. To prepare this report we had to collect data from both primary and secondary
sources-

i. Primary Data:
Primarily we collected data from annual report of the company from 2009 to 2013. We also collect
the information by Discussing with our group members and also from our textbook.

ii. Secondary Data:

We also collect data from secondary sources. As:

Different journals
Through wed browsing
Annual report (2012-2016)
Dhaka stock exchange

1.5 Limitations of the study:

This report has some limitation. Moreover the topic is so much vast, so we faced some
problems while preparing while preparing the report. The report is given as an assignment of
a course that makes it narrow prospect. The limitations acquainted with this report are as the
following:
 Collecting information was little bit tough
 Time of shortage
 Sometimes actual data is missing
 As a course assignment it gives a narrow prospect

xi
 Chapter 2

Appraisal of Dividend Policy of Deshbandhu Polymer Limited.

2.1 An overview of Deshbandhu Polymer Limited:

Deshbandhu Polymer Limited is a PP Woven bagging plant, an effort of vertically integrated

diversification of Deshbandhu Group. The basic plant is supplied by Hao Yu Precision
Machinery Co. Ltd. of Taiwan & Lohia Starlinger Ltd., India. 

Being registered with Board of Investment (BOI) and Joint Stock Company in 2006, the plant
started its production in 2007 with a yearly capacity of 12 Million 50 kg PP woven bags.
Recently the capacity has been expanded to 3.60 million 50 kg PP woven bags per year.
While maintaining its export class quality in PP yarn extrusion, weaving, film blowing,
printing, cutting and stitching, Deshbandhu Polymer Limited is emerging as the fastest
growing PP woven bag plant in the country with a wide range of products.
We are proud to introduce ourselves as a manufacturer of the best quality PP Woven Bag in
Bangladesh suitable for packing Food Grain, Wheat Flour, Chemicals, Cattle Feed, Fish
Feed, Sugar, Fertilizer & many more things. Our daily production capacity is 1,60,000 Pcs &
we can supply according to the required specifications of the buyer round the year at a
competitive price.
Deshbandhu Polymer Limited is an ISO 9001:2008 Certified Company. At every stage of
production, stringent quality control measures are adopted to ensure consistently good quality
products.

Tapes are tested for their:

 Strength.
 Elongation.
 Width.
 Thickness.
 UV.

Fabrics are tested for:

 Strength.
 Elongation.
 Color.
 Mesh.
 Dimensional Stability.
 UV.

xii
FIBCs are tested for :
 UV.
 Cyclic Top Lift Test.
 Compression Test.
Their Commitment: 
High tensile strength, Good caring capacity, Fresh color, High glossy print, Durable using,
UV protection, Food grade material.
 Reasonable and competitive price,
 Strict quality control,
 Quick shipment,
 Good service 

xiii
2.2 An appraisal of dividend practices of Deshbandhu Polymer Limited:

Growth of Net Income:

Net income is calculated by taking revenues and adjusting for the cost of doing business,
depreciation, interest, taxes and other expenses. This number is found on a company's income
statement and is an important measure of how profitable the company is over a period of
time. The measure is also used to calculate earnings per share.

Table: Net Income and growth rate

Years Net Income ( In TK) Growth rate (in %)

2011 51,013,655 --
2012 53,464,003 4.80
2013 12,551,174 -76.52
2014 53,197,554 323.85
2015 23,029,749 -56.71
Growth Rate2012= (Net Income2012 –Net Income2011)/Net Income2011 * 100

Fig : Net Income ( In TK)

60,000,000

50,000,000

40,000,000

30,000,000

20,000,000

10,000,000

0
2011 2012 2013 2014 2015

xiv
 Fig: Growth Rate of Net Income (In %)
350
300
250
200
150
100
50
0
2011 2012 2013 2014 2015
-50
-100

Growth in net income is even more important than sales because net income tells the investor
how much money is left over after all of the operating costs are subtracted from sales. From
the above table, Deshbandhu Polymer Limited faces a significant net income in the year
2011, 2012 and 2014. But the company faces low growth in net income in the year 2013 and
2015.

xv
Growth of Retained Earnings:

Net income is divided into two parts. One is dividend and another is retained earnings.
Retained Earnings is the percentage of net income which is not paid out as dividends, but to
be reinvested in its core business or to pay debt. It is recorded under shareholders' equity on
the balance sheet.

Table: Retained earnings and growth rate

Years Retained Earnings (Growth Rate in %)

2011 70,254,118 --
2012 55,698,521 -20.72
2013 32,385,096 -41.86
2014 61,432,651 89.69
2015 33,747,399 -45.07
Growth Rate2012= (Retained Earning2012 -Retained Earning2011)/Retained Earning2011*100

Fig: Retained earnings( in TK)

80,000,000

70,000,000

60,000,000

50,000,000

40,000,000

30,000,000

20,000,000

10,000,000

0
2011 2012 2013 2014 2015

xvi
 Fig: Growth of Retained Earning (In %)
100

80

60

40

20

0
2011 2012 2013 2014 2015
-20

-40

-60

In this graph we can see that the company decreases the retained earnings and increase its
dividend up to the year 2013, because the company faces a positive growth rate in its net
earnings. But in 2013 Deshbandhu Polymer Limited face a negative growth rate in their net
earnings. So they decrease their dividend and increase the percentage of retained earning up
to 89.69%.

xvii
Growth of Cash Dividend:

A cash dividend is money paid to stockholders, normally out of the corporation's current
earnings or accumulated profits. All dividends must be declared by the board of directors, and
they are taxable as income to the recipients.

Table: Cash Dividends and growth rate

Years Cash Dividends ( In TK) Growth Rate ( in %)

2011 -- --
2012 -- --
2013 22,193,790 --
2014 -- --
2015 -- --

In 2013 the company declared cash dividend. Then in the following years and the previous
years the company didn’t declare any cash dividend because they don’t have enough profit to
give cash dividend and their growth of net income become negative in the following years.
The company may also be in growth stage that’s why they are giving less cash dividend
because they are relying heavily on internal sources of funds.

Growth of Stock Dividend:

A stock dividend is a dividend payment made in the form of additional shares rather than a
cash payout, also known as a "scrip dividend." Companies may decide to distribute this type

xviii
of dividend to shareholders of record if the company's availability of liquid cash is in short
supply.

Table: Stock Dividends and growth rate

Years Stock Dividends( In Growth Rate (In %)

TK)
2011 -- --
2012 60,000,000 --
2013 23,000,000 -61.67
2014 24,150,000 5.00
2015 50,715,000 110.00
Growth Rate2013= (Retained Earning2013 -Retained Earning2012)/Retained Earning2012*100

Fig: Stock Dividends (In Taka)

70,000,000

60,000,000

50,000,000

40,000,000

30,000,000

20,000,000

10,000,000

0
2011 2012 2013 2014 2015

The
company’s cash position is inadequate for paying out cash dividends. So they pay their
shareholders in stock dividend. In 2010 to 2013, the company gives stock dividend because
their growth rate of net income becomes negative. So by giving stock dividend the company
increases its liquidity. There is also a reason for giving stock dividend that is reduce the tax

xix
Dividend Payout Ratio:

The dividend payout ratio shows the amount of dividends paid to stockholders relative to the
amount of total net income of a company. The amount that is not paid out in dividends to
stockholders is held by the company for growth. The amount that is kept by the company is
called retained earnings.

Table: Dividend Payout Ratio

Years Net Income ( In TK) Dividend (In TK) Dividend Payout

Ratio (In %)
2011 51,013,655 0
2012 53,464,003 0
2013 12,551,174 23,000,000 183.25
2014 53,197,554 0
2015 23,029,749 0
Dividend Payout Ratio2012= (Dividend2012 / Net Income2012) * 100

xx
 Fig: Dividend Payout Ratio (In %)
200
180
160
140
120
100
80
60
40
20
0
2011 2012 2013 2014 2015

From the bar graph, it can be said that Deshbandhu Polymer Limited had the only dividend
payout ratio in 2013 that means the company paid 183.25% of its net income as dividends to
the shareholder. No dividend was paid on any other year due to cash constraint.

Growth of Earnings per Share:

An Earnings per Share (EPS) is the amount of money earned by a company expressed in per
share. Following table provides the information of EPS of Deshbandhu Polymer in different
years.

Table: Earning Per Share

Years EPS Growth of EPS (In %)

2011 1.52
2012 1.16 -23.68
2013 0.25 -78.45
2014 1.05 320.00
2015 0.41 -60.95
Growth Rate2012= (EPS2012 - EPS2011)/EPS2011*100

xxi
 Fig: Earning Per Share (In TK)
1.6
1.4
1.2
1
0.8
0.6
0.4
0.2
0
2011 2012 2013 2014 2015

Fig: Growth of EPS (In %)

350
300
250
200
150
100
50
0
2011 2012 2013 2014 2015
-50
-100

It shows that from 2011 to 2015, EPS is increasing and decreasing respectively. It is
fluctuating in this time period. EPS was not same in those years. Even the EPS was
decreased. So the growth of EPS was also negative in the particular years. We can also see
that the growth of Earning per share is decreasing each year, which is not good for both the

xxii
firm and for the shareholders. Then it started to increase from 2013 to 2014. Then again fall
in 2015.

Price Earnings Ratio:

The price-earnings ratio (P/E Ratio) is the ratio for valuing a company that measures its
current share price relative to its per-share earnings.

Table: Price Earnings Ratio

Years Market Value per share EPS P/E Ratio

2011 33.80 1.52 22.24
2012 21.23 1.16 18.30
2013 19.86 0.25 79.44
2014 20.80 1.05 19.81
2015 11.00 0.41 26.83
P/E Ratio2011= (Market Value2011 / EPS2011)

xxiii
 Fig: P/E Ratio
90
80
70
60
50
40
30
20
10
0
2011 2012 2013 2014 2015

From the above table and figure shows that in 2013 P/E ratio is higher because EPS is lower.
Then P/E ratio decreasing due to increase in EPS which is good for the corporation.

Dividend Theory and Policy Appraised by the Company:

When the company face positive rate in its net earnings it gives a high percentage of dividend
to its share holders, but in year 2013 and 2015 the company face negative growth in its net
earnings and it decrease its dividend rather increase retained earnings.

Years Market Value Per Share Dividend (In Tk)

2011 33.80 --
2012 21.23 --
2013 19.86 23,000,000
2014 20.80 --
2015 11.00 --

In the table we can see that the company paid its dividend on the year 2013 but the share
price did not increase. So we can say that there is no relationship between share price and
dividend. So the company follows the dividend irrelevance theory.

xxiv
When a company gives a percentage of stock to its share holders as dividend is known as
stock dividend. We see that from 2012 the company gives a percentage of shares to its share
holders as stock dividend.

Chapter 3

Findings and Conclusion

3.1 Findings of the study: After analyzing the dividend policy of Deshbandhu Polymer
Limited, we have found the following facts-

 There is fluctuation in the growth of net income over the whole time. Growth in net
income was 4.80% during the financial year of 2011-12. A huge fall in growth of net
income noticed in year of 2012-13, it was -76.52%. Tremendous growth noticed on
2013-14 as it was 323.85% and again fall in 2014-15 by -56.71%.
 Fluctuation is also noticed in the growth rate of retained earnings. During 2011-12 it
was -20.72% and decreased to -41.86% in 2012-13. Pulled up to 89.69% during 2013-
14 and drastically reduced in 2014-15 by -45.07%.
 As per the factors affecting dividend policy it is said that, firms at introductory and
growth stage pay less cash dividend than firms at matured stage. So, Deshbandhu

xxv
 Polymer limited is also paying less cash dividend as it is in growth stage. It paid cash
dividend only to the preferred shareholders in 2012-13, amounting 22,193,790 TK.
 Stock dividend is the substitute of cash dividend. As the firm is in growth stage, it
needs more cash to invest in new projects and pay long term debts. Considering this
issue the firm prefers stock dividend at a regular basis. In the beginning, the growth of
stock dividend payment was -61.61% in 2012-13 later on, it increased to 5% and
110% respectively on 2013-14 and 2014-15.
 The Growth of dividend payout ratio of the company is absent. Because the firm is
giving stock dividend instead of cash dividend most of the time. The only payout ratio
is on 2013 that is 183.25%.
 An interesting fact has been found that, excellence of the business progress reached
during 2013-14. All the vital factors of the firm indicate this progress as net income,
retained earnings, dividend payment holding higher value than the other years of
operations. So it can be easily said that this firm operated successfully in 2013-14.

Conclusion:

This report is conducted on the appraisal of dividend policy for 5 years. After analyzing the
relevant information it can be said that Deshbandhu Polymer limited is following dividend
irrelevance theory and the firm does not pay cash dividend regularly rather they pay stock
dividend at a regular interval. The present market performance of the company cannot be
justified so easily at this position as the company has been operating for a short time horizon.
The overall scenario of the corporation is not up to the mark. The statistics regarding net
income, retained earnings shows that, the vital factors of the organization is not stable rather
very fluctuating. It has been noticed that during 2013-14, the overall business progress gained
a leverage to perform better in the future. The company has paid dividend only once during
2012-13 and it seems like that most of the shareholders prefer future capital gain rather than
regular dividend income. The firm is in growth stage so it will require heavy financing in the
near future to invest in business expansion projects or paying off long term debts. Stock
dividend payment had decreased previously but recovered in the most recent past years and
hoped to be increased in the near future as the volume of share is increasing. Analyses
regarding some other factors show moderate condition of the organization. Dehbandhu

xxvi
Polymer limited achieved A+ grade on credit rating in terms of long-term debt in 2013 by
NBR. So we can consider that Deshbandhu Polymer limited can continue the dividend
irrelevance theory until it gets stability in the market as well sustainability in the business
operations. In terms of shareholding position, most of the shares are public owned and after
that there are directors/sponsors, there are some institutional investors and no government
owned shares.

Reference:

1. DESHBANDHU POLYMER Limited Annual Report 2011-2015. Retrived on 16 th March

2017,from http://lankabd.com/companies/listPortalPaginationAnnouncement.html?
isLimited=true&storyPortalCategoryId=2&companyId=50&stockId=382

2. investopedia (2009). Dividend Policy. Retrived on 16th March 2017 from

http://www.investopedia.com/walkthrough/corporate-finance/5/dividends/policy.aspx

xxvii