Analysis of Effect of Return on Equity and Debt to Net Worth Ratio of

Pay Out Ratio In Exchange Member Companies Indonesia The Earned

Income

Ery Niswan, Febriati

Universitas Panca Bhakti Pontianak Jalan Yos Sudarso Kom

Telephone 0561776820 Email: eryniswan.en@gmail.com

Abstract

In investments, shareholders want dividends as income on capital that is spent

into the ownership of shares, and based on observations on the financial
statements of the companies in the Indonesia Stock Exchange in 2013 and
2014, there are companies that earn net income, but an additional large
retained earnings equal to the amount of net income, which means the
company's profit in the year to hold the entire profit and does not divide the
dividend, that the publication of the company's financial statements from
about 3 to 6 months of next year, meaning that the publication also includes
the results of the general meeting of shareholders.

In the period of time specified rules, the shareholders entitled to receive

dividends, the problem is the decision to divide the dividend are taken by a
majority vote, the decision of the majority shareholder could be a dividend but
can also delay the payment of the dividend that is retained earnings (plow
back) for expansion and thus suspend the right of minority shareholders, as a
minority shareholder, it is clearly contrary to their interests, and thus the
minority shareholders could take action withdraw their assets by selling their
shares.

The purpose of this study was to determine the factors that affect the majority
of shareholders in making an informed decision on the dividend policy when
the company makes a profit, as the company has the option to pay the dividend
portion and retained earnings in part, but any decision taken should have a
basic, first, the weighted cost , the weighted cost as a determinant of the level
of operating costs, determined by the rate of debt as the company's liabilities
for the debts and the return on equity as profit levels required by the owner of
shares, to obtain dividends.

Keywords: payout ratio, return on equity, Debt to Net Worth Ratio, Plowback
Ratio, Net Income, Dividends

1. Introduction
Investment is an investment for a long time, someone who set up the company
and invest in a company called the owner and capital are recognized in the
equity of companies called equity, proof of ownership of the company stated
in the form of shares, so that the person called is also a shareholder of the
company (owner) or stockholder. Owner of the company or shareholders
receive a share of profits from the post net income or profit after tax of the
profits distributed on each throw shares of the company so that earnings per
strip of shares is equal to net income divided by the number of shares is called
a dividend per share or dividend per share or DPS , Aside from shareholders
who wish to obtain a share of profits in dividends, there are shareholders who
own shares with the aim to make a profit (margin) of the difference (spread)
share purchase price and selling price.In indicator of corporate performance,
earnings after tax are the rights of shareholders are shown in the profitability
ratio of equity capital or the rate of return for the owners or return on equity,
earnings, capital itself is information of financial performance that are
strategic for management because the information in the benchmark attention
management against shareholders who have full authority to appoint or
dismiss directors of the company.

Overall the income statement is a summary of financial activities during the

period is generally one year, the issues that exist in the income statement are
income and expenses and profits or losses of the period, the balance provides
information about the position of the company's assets at end of period and on
the right side of the balance sheet are assets of the company in the form of
money and its origin, there are three groups of financial assets on the right side
of this is short-term debt (current liabilities), long-term debt and equity, of the
name post used the assets of unknown origin that is derived from debt and
equity capital.

The left side of the balance sheet is asset information that has been activated
(assets) in the form of real assets are classified in current assets and non-
current assets (fixed assets), because the right side is the origin of the property
or financial assets and the left side is the change in shape becomes a real asset,
then it is the same with the left side of this huge right hand side (balanced /
balance).

Thus the balance sheet is informative report, because once read a balance sheet
it will be known the wealth of company on the source of wealth, equity and or
debt (right side), or the form of the company's assets in the form of tangible
asset that is on the left side of the balance sheet.

Generally, the company was first established with the aim to take advantage of
opportunities through business activities that can provide benefits, while the
process for obtaining such advantages preceded by mobilizing resources
owned, financial and other forms of so-called capital to conduct business
activities that, if the business activities carried out in accordance with that
carried out by business entities and is run according to plan, then it will turn
profitable, thus at the end of the period of activity or at the end of a period of
time, these enterprises have capital position coupled with advantage, if a
business entity that has no debt or debt is equal to 0, then the mathematical
accounting, wealth equal to the capital.

If the next time period business entities that have the opportunity to do
business larger and require more capital then he can use the advantages of the
previous activity are to increase their capital, in other words he retained
earnings to increase capital in order to make a further effort, this is one way
the company membesarkanya internally without enter or obtain additional
capital from other sources.

Richard A. Brealey, Stewart C. Myers, Franklin Allen (2011) Principle 10 ed

financial companies p.6 describe how the flow of money flows from investors
for corporate and return to investors again. The flow begins when the cash
raised from investors, according to them the following

- Flow 1 cash generated or it could come from a bank or from securities sold
to investors in the financial markets. the cash

- Flow 2 is then used to pay real assets (investment project) required for
corporate business (arrow 2). Then, as the businesses operate,

- Flow 3 assets generating cash flow (arrow 3).

- Good cash flow 4a reinvested and 4b or flow back to the owners of the funds,
the debt if it is of interest, whereas if the shareholder or the investor in the
form of cash dividend

Of course, the choice between the flow 4a and 4b in accordance with the
agreements or commitments made at the beginning of cash acquired, for
example, if a company borrows money from a bank in stream 1, he must pay
this money plus interest

Mathematically, if the net profit is the full amount or as a percentage

expressed in units of 100%, or 1, while the flow of the net profit of only two
streams are being plowed back into the company in a certain ratio called the
plow back ratio and inserted or added in retained earnings (retained earnings),
and the other stream is in a portion or a certain ratio is piped out of the so-
called payout ratio and is used to pay dividends. Thus the mathematical
formula for the flow POR = 1 - PBR, if plow back 40% or 0.4 then pay out
60% or 0.6.

The owner company and owner of the shares, wants the company makes a
profit and thus he could get a share of the dividend, but inflation and resource
scarcity and competition, demanding the company set up the future so that the
company must be careful in profit sharing in the form of dividends, due to the
growing demands require companies also withhold a portion of profits.

Majority owner of the company must also consider the interests of minority
shareholders on the share of profits they expected, so that shareholders can be
protected minority interests and do not transfer their capital to other companies
or investments in other sectors.

2. The desk review and formulation of the problem

Definition of Capital Structure

The decision to choose the sources of financing is a decision that the financial
sector is very important for the company (Riyanto, 2001)

The ratio of long-term debt to equity itself describes the company's capital
structure and debt to equity ratio will determine the amount of financial
leverage used by the company (Weston and Copeland, 1992).

The capital structure is a combination of a mix of all the post that goes into the
right side of the balance sheet the company's capital resources. Understanding
capital structure distinguished by its financial structure, in which the capital
structure is a permanent spending that reflects the long-term debt with its own
capital, while the financial structure reflects the balance of the entire debt
(long term and short term) with its own capital.

The structure or composition of capital must be arranged so as to guarantee the

financial stability of the company, there is no measure

certainly on the number and composition of the capital of each company, but
basically setting the company's capital structure must be oriented to the
achievement of financial stability and ensuring the survival of the company.

Of the notions presented before conclusions can be drawn about the capital
structure which is the ratio or the balance between long-term debt and equity
capital or the so-called (long-term debt to equity or leverage) used financial
company in achieving financial stability and viability of the company.

Capital Structure Theory

Capital structure theory to explain the influence changes in capital structure to

the company's value, if investment decisions and dividend policy are held
constant. In other words, if the company to replace some of their own capital
to the debt or conversely whether the stock price will change if the company
does not change the financial decisions of other (Husnan and Pudjiastuti,
2002). Here are the various theories of capital structure related to this research.
Approach Modigliani and Miller

Modigliani and Miller approach assuming perfect markets and no tax states
that capital structure does not affect the value of the company or in other
words capital structure is irrelevant. After incorporating elements of the capital
structure becomes relevant taxes for companies that use debt in their capital
structure will get tax savings. These savings can be obtained because the
taxable income will be reduced by the use of debt so that the amount of tax
paid is less than the company has no debt. This approach will bring to a
conclusion more and more the use of debt in the capital structure, the greater
the savings achieved so that the better off the company's value. But the value
of the company it will not be maximized with the use of debt to 100%. Capital
market imperfections cause bankruptcy costs and the high cost of capital due
to the credit rating of either low or when the debt has been reached on the
choice to balance (trade off) the benefits and costs of using debt (Hendri and
Sutapa, 2006). Proposition Modigliani and Miller on the whole a very
important role and become the basis of the theory of capital structure, many
scientists who question the relevance of the proposition. Modigliani and Miller
theorem weakness lies in the basic assumptions of the proposition itself that
makes the assumption that the debt levels are not related to the company's cash
flow, Modigliani and Miller said that the assumption of efficient markets is the
basis of those arguments.

The Asset Structure

The structure of assets in the company have any impact on sources of

financing. Most industrial companies mostly invest embedded in fixed assets
will give priority to the permanent capital of capital is capital itself, while its
debt only as a supplement. So it can be said that the structure of assets has an
influence on the capital structure. If the measurement of the asset structure is
based on the ratio of total assets to total assets then theoretically there is a
negative relationship between the structure of assets and capital structure.

Thus the higher the asset structure (which means the greater of fixed assets),
then use your own capital will be higher (foreign capital is getting a little) in
other words, the lower the capital structure (Yuke and Hadri, 2005).

Return On Equity

ROE (Return On Equity) or income on capital is the ratio that indicates the
company's ability to generate net income by using their own capital and net
income available to owners or investors.

Return on equity derived from the net income or profit after tax, net income
divided by the sum of equity capital is called the return on equity and when
divided by the number of shares referred to earnings per share or earnings per
share or EPS. After the general meeting of shareholders decided to divide the
dividend, the dividend divided by the large number of shares is called a
dividend per share or DPS.

Pay Out Ratio

Payout ratio is the percentage of net profit directed or to pay dividends.

Plow Back Ratio

Plow Back Ratio is the percentage of net profit directed or put back in retained
earnings post

Net Worth to Debt Ratio

Net worth according to Bambang RJ (1:36), is the difference of total assets

less debts ie equity or equity, while the Debt to Net Worth Ratio is the ratio
between equity with debt

The cost of equity, the CAPM model aimed at obtaining shareholder dividend
Ri = Rf + (Rm – Ri) bI

Weighted average cost of capital, ie the proportion of each foreign capital

(loans) with its own capital multiplied by the cost of capital respectively.

Net worth to debt ratio in the capital structure is the ratio between equity with
debt, these structures are determined by company policy towards foreign
capital loan or debt, for example through bank loans.

With through bank loans, the company must comply with the provisions of the
legal lending limit, if the amount of the debt are nearing the maximum limit
that firms adjust debt structure transform and meet the provisions of the
maximum borrowing limit

3. Formulation of the problem

Based on the description ditas, then that becomes a problem in this study is
whether the amount of return on equity and net worth to debt ratio affects the
payout ratio

4. Restrictions problems

This study is limited to

1. Companies sector companies studied are not a bank and non-bank financial
institutions

2. In a report to be research objects are years financial statements 2013 and

2014, the reason is that investing in stocks in order to receive the dividend
requires a relatively long time, the full dividend will be obtained for the period
of ownership of at least one year, if investors do not earn dividends then the
capital as unemployed for one year, if deposited in state banks that have a low
risk, then at least he could get a return of between 4% - 6%

5. The purpose of the study

The purpose of this research is

1. Determine the influence of the rate of return on equity against the payout
ratio

2. Determine the influence of net worth to debt ratio to dividend payout

6. Benefits Research

This research is expected to provide benefits to

1. The investror who wish to obtain dividends in choosing the company that
became their investment objectives

2. Management of the company, to maintain and establish the distribution of

dividends to the shareholders of the company

7. Previous studies

This study is an extension of a previous study conducted by this research Zulia

Hanum, SE, M.Si (2009) which concluded that the Return On Asset (ROA)
partially not have a significant effect on stock price and Return On Equity
(ROE) is partially influenced significantly and negatively affect the stock price
and Earning Per Share (EPS) partially significant and positive influence on
stock price

Agus Wiyatno (2013) who studied the relationship with the Pay Out Ratio
ROE find that the Return On Asset positive and significant impact on the
Dividend Payout Ratio in companies listed on the Stock Exchange of 2009-
2011

As for the research on the influence or relationship Net Worth to Debt Ratio to
Pay Out Ratio has not been found, the reason is necessary to study the effect
of Net Worth to Debt Ratio to Pay Out Ratio for assuming a large debt
remains, then additional earnings in equity shows the company's expectations
that the large debt that remains, then additional equity capital through retained
earnings, the cost of equity capital into smaller or fixed so that the cost of
capital (Average cost of capital) becomes lower.

Based on the theoretical basis and research above, the formulation of the
hypothesis in this study as follows:
H01 -> Pay Out Ratio influenced by Return on Equity

Y = a + b.X1

Where

Y the dependent variable, is the payout ratio

X1 independent variables are Return on equity or equity capital profitability

H02 -> Pay Out Ratio influenced by Net Worth to Debt Ratio

Y = a + b.X2

Y the dependent variable, namely the Pay Out Ratio

The independent variable X namely Net Worth to Debt Ratio

H03 -> Pay Out Ratio influenced by Return on Equity and Debt to Net Worth
Ratio

Y = a + bX.1 + c.X2

Based on the hypothesis of the research model is as follows

Return On Equity
Payout Ratio
Net Worth to Debt Ratio

8. Research Methods

This research is quantitative,

a. Consists of two variables are independent variables and the dependent

variable, pay out ratio as the dependent variable is affected by the amount of
return on equity and net worth to debt ratio.

b. Population and sampling methods

The population in this study are all public companies listed there as much as
447 Indonesian Stock Exchange Integration

Samples and sample method

The sample in this study is a company that makes a profit and the number of
positive flow of net income retained earnings and dividend payout of 30
companies.
Thus the sampling technique used is the technique of deliberately making the
company makes a profit and the company that makes a profit is taken
deliberately random (random purposive sampling)

c. The analysis tool

The analysis tool in this research is a linear regression model and multiple
regression analysis to test the hypothesis statistically. Multiple linear
regression calculation is as follows

Y = a + b1x1 + b2X2

Note:

Y = Payout Ratio

a = intercept or constant,

b1, b2 = regression coefficient

X1 = Return on Equity

X2 = Net Worth to Debt Ratio

d. Mechanical Analysis

This study uses IBM SPSS Statistics were no greetings, including the use
separately or partial regression and multiple regression test by using SPSS and
Excel.

9. Results

Testing the effect of Return on Equity to Pay Out Ratio

a. Effect of Return on Equity to Pay-out Ratio

Regression

Variables Entered/Removeda
Model Variables Variables Method
Entered Removed
b
1 ROE . Enter
a. Dependent Variable: POR
b. All requested variables entered.
 Model Summary
Model R R Square Adjusted R Std. Error of
Square the Estimate
1 ,184a ,034 ,000 23.630
a. Predictors: (Constant), ROE

ANOVAa

Model Sum of df Mean Square F Sig.

Squares
Regression 565,332 1 565,332 1,012 ,323b

1 Residual 16192,345 29 558,357

Total 16757,677 30
a. Dependent Variable: POR

b. Predictors: (Constant), ROE

Coefficientsa
Model Unstandardized Coefficients Standardized t Sig.
Coefficients
B Std. Error Beta
(Constant
17,238 7,493 2,300 ,029
1 )
ROE ,319 ,317 ,184 1,006 ,323
a. Dependent Variable: POR

From the results of the regression calculation above, it is known that the
influence of the Pay Out Ratio ROE is very low with R Square of 0.034 with a
significance level of 0.323.

Thus known at the object, that keputusah pay dividends (POR) is not affected
by Return on Equity, meliankan by factors beyond the ROE

b. Effect of Debt to Net Worth Ratio of Pay Out Ratio

Regression

Variables Entered/Removeda
Model Variables Variables Method
Entered Removed
1 NWDRb . Enter
a. Dependent Variable: POR

b. All requested variables entered.

Model Summary
Model R R Square Adjusted R Std. Error of
Square the Estimate
a
1 ,061 ,004 -,032 24.302
a. Predictors: (Constant), NWDR

ANOVAa
Model Sum of df Mean Square F Sig.
Squares
Regression 61,361 1 61,361 ,104 ,750b
1 Residual 16536,106 28 590,575
Total 16597,467 29
a. Dependent Variable: POR
b. Predictors: (Constant), NWDR

Coefficientsa
Unstandardized Standardized t Sig.
Model Coefficients Coefficients
B Std. Error Beta
(Constant) 22,357 6,451 3,466 ,002
1
NWDR ,741 2,299 ,061 ,322 ,750
a. Dependent Variable: POR

From the above calculation results obtained figures showing the R-square of
0.04 NWDR very low influence on the POR, with a significance level of
0.750.

Thus it is known that the payment of dividends (POR) is not affected by the
amount of debt compared to equity (Net Worth to Debt Ratio) in the
company's assets.
c. Effect of ROE and NWDR to POR

SUMMARY OUTPUT

Regression Statistics
Multiple R 0,192102375
R Square 0,036903323
Adjusted R
Square -0,03443717
Standard Error 24,33226334
Observations 30

ANOVA

df SS MS F Sig. F
0,6019264
Regression 2 612,5257714 306,2628857 0,517284368 7

Residual 27 15985,59406 592,0590394

Total 29 16598,11983

Coef- Std t P- Lower Upper Lower Upper

ficients Error Stat value 95% 95% 95.0% 95.0%
Intercept 14 10,50 1,37 0,18 -7,18 35,90 -7,18 35,90
X Variable 1 0 0,35 0,96 0,34 -0,38 1,05 -0,38 1,05
X Variable 2 1 2,40 0,58 0,57 -3,53 6,30 -3,53 6,30

Testing simultaneous influence of Return on Equity and Net Worth to Debt

Ratio to Pay Out Ratio gives the result that two independent variables did not
affect the amount of payout ratio, thus the amount of payout ratio is influenced
by factors beyond the size of return on equity and and the ratio of equity
capital to debt.

From the calculation of ROE and Net Worth factor to Debt Ratio of dividends,
it is known that, these two factors do not affect the payout ratio significantly,
hand management company and the majority shareholder should have thought
that no investors were willing to invest their capital on its books free.

Investors are included in a group of minority shareholders have the same

motivation with other investors, are taking advantage of opportunities on its
equity income
The safest option of investors are depositing money in a bank is the safest state
banks, generalized income opportunities ranging between 4% -6%, and is said
to be the safest investment or no risk.

With retained earnings or did not pay a dividend in the financial year, or one
year, investors lost revenue opportunities at a minimum level of income
without risk, if the minority shareholders have not received a satisfactory
explanation, it is difficult to resist the company of their capital remains
invested in the company.

The question of why the company did not pay dividends when the company
makes a profit has two reasons, first is to cover losses accumulated in previous
years, while another reason is the existence of an investment plan that is an
expansion that is developing a new business or increase the capacity of the
existing or replacement of the core assets of the company because the things
that are unavoidable like finding new technologies that can endanger the
survival of the company today.

Whatever the reasons given to minority shareholders when there is no

dividend payment should be using the proposed profitable and delivered at the
right time and the right time is the general meeting of shareholders.

In terms of the general meeting of shareholders, there are two important points
that dividend paid no company makes a profit or take another decision which
is the first implementation of the general meeting of shareholders and the
second is the decision to divide the dividend, because although it has been
held general meeting of shareholders is uncertain decision will divide the
dividend.

The general meeting of shareholders is the media decision-making regarding

the distribution of dividends, to the minority shareholders should have the
power to be shareholders meeting happen every year, and in this case is based
on the strength of pertinent laws and regulations.

10. Conclusions and Recommendations

a. Conclusion

Based on the results of the discussion above, it can be concluded the following
results:

1. Not all the companies who profit split dividend to shareholders

2. Of the 30 companies that pay dividends, Pay Out Ratio levels by an average
of 23.86%, thus the net income that goes back (Plow Back Ratio) in the
company and sign posts profit (retained earnings) amounted to 76.14%
3. Of the 30 companies that pay dividends, the level of the average ROE of
companies amounted to 19.91%

4. No (very small) effect of Return On Equity to pay out ratio

5. There is no (very little) influence Debt to Net Worth Ratio payout ratio

6. Comparison of the average between the equity and the debt of 2.04: 1

b. Recommendations

Based on the above results, it is recommended to investors who want dividend

1. Be careful in making investments, given the capital has a good chance to

earn more money in the stock market and in other sectors

2. observation of companies that pay dividends when it makes a profit

3. That the use of other people's money for capital is one thing and split the
profit is one thing for another, thus the shareholders as dividend investors
should fight for their rights through the legal process begins decision of
general meeting of shareholders does every year, especially when the company
gained profit.
 14/5000

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