Finance Ashok Bba Summer Project Report

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Finance Ashok - BBA summer project report
Bachelors of Business Administration (Tribhuvan Vishwavidalaya)
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Impact of Interest ratio, Earnings per share and P/E Ratio on Dividend
payout of commercial banks of Nepal
(Special reference to NABIL, SBL, SCB)
BY
Ashok Regmi
TU Registration. No. 7-2-22-41-2014
Exam Roll No. 14453/14
A Summer Project Report Submitted to
Faculty of Management, Tribhuvan University

In partial fulfillment of the requirements for the degree of
Bachelor of Business Administration
At the
Patan Multiple campuses
Tribhuwan University
Patandhoka, Lalitpur
May, 2018

Certificate from Supervisor
This is to certify that the summer project entitled “Impact of Interest ratio, Earnings per
share & P/E Ratio on Dividend payout of commercial banks of Nepal(special reference
to NABIL,SBL,SCB)” is an academic work done by “Ashok Regmi” submitted in the partial
fulfillment of the requirements for the degree of Bachelor of Business Administration at
faculty of management, Tribhuwan University under my guidance and supervision.
Signature of the supervisor
Name: Bijaya Goppal Shrestha
Date: May, 2018
ii

VIVA-VOCE SHEET
We have conducted the viva-voce examination of the summer project report presented
Submitted By:
Ashok Regmi
Patan Multiple Campus
Patandhoka, Lalitpur
TU Registration Number: 7-2-22-41-2014
Entitled:
Impact of Interest ratio, Earnings per Share & P/E ratio on Dividend payout of
commercial banks of Nepal (special reference of NABIL, SBL, SCB)
We found the summer project report to be the original work of the student and written
according to the prescribed format. We recommend the summer project report to be accepted
as partial fulfillment for the degree of Bachelor of Business Administration (BBA).
Viva-Voce Committee
Head, Research Department ………………
Member (Supervisor) ………………
Member (External Expert) ………………
Date: ………………..
iii

Student’s Declaration
This is to certify that I have completed the Summer Project entitle “Impact of Interest ratio,
Earnings per share and P/E Ratio on Dividend payout(special reference to
NABIL,SBL,SCB)”. under the guidance of DR. Yuga Raj Bhattarai and Prof.Bijaya Gopal
Shrestha in partial fulfillment of the requirements for the degree of Bachelor of Business
Administration(BBA) at Faculty of Management, Tribhuvan University.
Date: May, 2018
Signature:
Name: Ashok Regmi
iv

Acknowledgment
I would like to express my heartfelt gratitude to all those who have helped me to prepare this
project report.
I would like to thank Tribhuvan University for providing us such project work to broaden our
theoretical knowledge into real practical life. And also want to thank my college, Patan
Multiple Campus for guiding me for the completion of the project. I am also thankful to Mr.
Yugraj Bhattarai, Program Director of Patan Multiple Campus for his direct and indirect
support during my research that counts in my study.
I would like to express my sincere thanks to Mr. Bijaya Gopal Shrestha, my supervisor for the
summer project for guiding me throughout. His suggestions were very useful and have helped
me to a successful completion of this report. I would also like to thank my friends for helping
me when necessary.

Table of Contents
Certificate from Supervisor.......................................................................................................................ii
VIVA-VOCE SHEET..............................................................................................................................iii
Student’s declaration................................................................................................................................iv
Acknowledgment.......................................................................................................................................v
List of Tables..........................................................................................................................................viii
List of Figures...........................................................................................................................................ix
List of Abbreviation...................................................................................................................................x
Executive summary..................................................................................................................................xi
Chapter- I Introduction.........................................................................................................................1
1.1 Context information.........................................................................................................................1
1.1.1 Interest ratio...............................................................................................................................5
1.1.2 Earning per share......................................................................................................................5
1.1.3 Price earnings...........................................................................................................................6
1.3 Purpose of the study........................................................................................................................8
1.4 Significance of the study.................................................................................................................8
1.5 Review of related literature.............................................................................................................9
1.5.1 Theoretical Review...................................................................................................................9
1.5.2 Empirical review....................................................................................................................13
1.5.3 Concluding remarks................................................................................................................17
1.6 Research Methodology..................................................................................................................18
1.6.1 Research Design.....................................................................................................................18
1.6.2 Data Collection Procedure......................................................................................................18
1.6.3 Population and sample............................................................................................................18
vi

1.6.4 Data Analysis Tools...............................................................................................................19
1.6.6 Financial tools........................................................................................................................19
1.6.7 Statistical Tools......................................................................................................................20
1.7 Limitation of the study..................................................................................................................23
1.8 Organization of the Study........................................................................................................23
Chapter-II Data Presentation and Analysis.......................................................................................24
2.1 Organization profile.......................................................................................................................24
2.1.1 Introduction to NABIL(Nabil Bank Limited)........................................................................24
2.1.2 Introduction to SBL(Siddhartha Bank Limited).....................................................................25
2.1.3 Introduction to SCB(Standard chartered Bank limited).........................................................25
2.2 Data presentation...........................................................................................................................27
2.2.1 Data presentation of DPR...........................................................................................................27
2.1.2 Data presentation of IR...........................................................................................................28
2.1.3 Data presentation of EPS........................................................................................................30
2.1.4 Data presentation of P/E.........................................................................................................31
2.2 Descriptive statistics of study variables........................................................................................33
2. 3 Result from correlation analysis...................................................................................................35
2.4 Result from the regression model..................................................................................................36
2.4.1 Analysis of Regression Model................................................................................................36
2.5 Major Finding of the study............................................................................................................37
Chapter III Conclusion and Action implication................................................................................39
3.1 Conclusion.....................................................................................................................................39
3.2 Action implication.........................................................................................................................40
REFERENCES
APPENDICES
vii

List of Tables
Table 2.1 Data analysis of DPR of NABIL, SBL, SCB..............................................................27
Table 2.2 Data analysis of IR of NABIL, SBL, SCB..................................................................28
Table 2.3 Data analysis of EPS of NABIL, SBL, SCB...............................................................30
Table 2.4 Data analysis of P/E ratio of NABIL, SBL, SCB.......................................................31
Table 2.5 Descriptive statistics of study variables.....................................................................33
Table 2.6 Correlation Analysis..................................................................................................35
Table 2.7 Regression Analysis...................................................................................................36
viii

List of Figures
Figure 2.1 Trend chart of DPR of NABIL,SBL,SCB.........................................................28
Figure 2.2 Trend chart of IR of NABIL,SBL,SCB............................................................29
Figure 2.3 Trend chart of EPS of NABIL,SBL,SCB.........................................................31
Figure 2.4 Trend chart of P/Eof NABIL,SBL,SCB............................................................32
ix

List of Abbreviation
Acronym Full form
DPR Dividend payout ratio
DPS Dividend per share
EPS Earnings per share
Int.exp Interest expense
Int.In Interest income
IR Interest ratio
NABIL Nabil bank limited
P/E Price earnings
SBL Siddhartha bank limited
SCB Standard chartered bank limited

Executive Summary
This study was performed with an objective of determining the association of the factors IR,
EPS, and P/E on DPR and the impact of those factors on DPR. The independent variables used
in the study were IR, EPS and P/E ratio and the only dependent variable was DPR. Three
commercial banks were taken as a sample out of the total twenty-eight banks. A period of
thirteen years was considered for the study.
Previous studies and documents regarding dividend payout ratio and its determinants were
reviewed in order to conclude which factors that potentially could have an impact on the
companies. It was found that there are several determinants of dividend payout ratio. Out of
those determinants, only three determinants were taken for the study to assess the impact it
posed on Dividend payout ratio. The previous empirical review showed that Earnings per
share and P/E ratio were often taken by scholars for their study. But Interest ratio was hardly
taken by scholars for their study.
The study follows quantitative research method and uses correlation analysis and regression
analysis to examine the relationship between the dependent and independent variables. The
result showed that all three independent variables possessed a significant relationship with the
dependent variable. Therefore, Interest ratio, earning per share and Price Earnings ratio
provided an impact on dividend payout ratio.
xi

CHAPTER- I
INTRODUCTION
1.1 Context information
Nepal is a least developed country resulting lower per-capita income. However, in recent days,
many reforms have been made in the financial sector of Nepal like liberalization of interest
rates, the creation of a basic regulatory framework and development of longer-term
government securities market. Participation of private sector in the financial sector will play
an important role in the economic development of the country.
In a capital market, all firms operate in order to generate earnings. Shareholders supply equity
capital, expecting to share in these earnings either directly or indirectly. Once a company
makes a profit, it must decide on what to do with those profits. They could continue to retain
the profits of the company, or they could pay out the profits to the owners of the firm in the
form of dividends.
When a company pays out a portion of its earnings to shareholders in the form of a dividend,
the shareholders benefit directly. If instead of paying dividends, the firm retains the funds to
exploit other growth opportunities, the shareholders can expect to benefit indirectly through a
future increase in the price of their stock. Thus, shareholder wealth can be increased through
either dividends or capital gains.
The dividend is that part of the net earnings of a corporation that is distributed to its
stockholders. It is a payment made to the equity shareholders for their investment in the
company.
Types of Dividends
Classifications of dividends are based on the form in which they are paid. Following given
below are the different types of dividends:

1) Cash dividend
2) Bonus Shares referred to as stock dividend in the USA
3) Property dividend interim dividend, annual dividend.
4) Special- dividend, extra dividend etc.
5) Regular Cash dividend
6) Scrip dividend
7) Liquidating dividend
8) Property dividend
Cash dividend
Companies mostly pay dividends in cash. A Company should have enough cash in its bank
account when cash dividends are declared. If it does not have enough bank balance, the
arrangement should be made to borrow funds. When the Company follows a stable dividend
policy, it should prepare a cash budget for the coming period to indicate the necessary funds,
which would be needed to meet the regular dividend payments of the company. It is relatively
difficult to make cash planning in anticipation of dividend needs when an unstable policy is
followed. The cash account and the reserve account of a company will be reduced when the
cash dividend is paid. Thus, both the total assets and net worth of the company are reduced
when the cash dividend is distributed. The market price of the share drops in most cases by the
amount of the cash dividend distributed.
Bonus Shares: (OR Stock -dividend in the USA)
An issue of bonus share is the distribution of shares free of cost to the existing shareholders, In
India, bonus shares are issued in addition to the cash dividend and not in lieu of cash dividend.
Hence, Companies in India may supplement cash dividend by bonus issues. Issuing bonus
shares increases the number of outstanding shares of the company. The bonus shares are
distributed proportionately to the existing shareholder. Hence there is no dilution of
2

ownership. The declaration of the bonus shares will increase the paid-up Share Capital and
reduce the reserves and surplus retained earnings) of the company. The total net-worth (paid-
up capital plus reserves and surplus) is not affected by the bonus issue. Infect, a bonus issue
represents a recapitalization of reserves and surplus. It is merely an accounting transfer from
reserves and surplus to paid-up capital.
Special dividend
In special circumstances Company declares Special dividends. Generally, company declares a

special dividend in case of abnormal profits.
Extra- dividend
An extra dividend is an additional non-recurring dividend paid over and above the regular
dividends by the company. Companies with fluctuating earnings pay additional dividends
when their earnings warrant it, rather than fighting to keep a higher quantity of regular
dividends.
Annual dividend
When annually company declares and pay a dividend is defined as an annual dividend.
Interim dividend
During the year any time company declares a dividend, it is defined as an Interim dividend.
Regular cash dividends
Regular cash dividends are those dividends that company exacts to maintain every year. They
may be paid quarterly, monthly, semiannually or annually.
Scrip dividends
These are promises to make the payment of dividend at a future date: Instead of paying the
dividend now, the firm elects to pay it at some later date. The ‘scrip’ issued to stockholders is
merely a special form of promissory note or notes payable.

Liquidating dividends
These dividends are those which reduce paid-in capital: It is a pro-rata distribution of cash or
property to stockholders as part of the dissolution of a business.
Property dividends
These dividends are payable on assets of the corporation other than cash. For example, a firm
may distribute samples of its own product or shares in another company it owns to its
stockholders.
In this study, only cash dividend and stock dividend are taken into consideration.
There are corporate laws that put limitations on the distribution of dividends, as corporations
have to keep reserves for the protection of creditors overall interest. Therefore, a good policy
is required to maintain a balance between shareholders interest with that of corporate growth
from internally generated funds. The return on shareholders should be better paid as dividends
since shareholders have invested opportunities to employ elsewhere. Financial management is
therefore concerned with the activities of a corporation that affect the well being of
shareholders. That well being can be partially measured by the dividends received, but a more
accurate measurement is the market value of the stock (Dean, 1973).
In Nepal, regular payment of dividends is under question. However, most of the joint venture
banks are committed to paying a dividend to the shareholders. The appreciation in the market
value of a share of these joint venture banks has, without any doubt, provided an adequate
sense of protection to shareholders (Shrestha, 1992).
There are several factors that provide an influence on dividend payout ratio of commercial
banks. This study is focused on the impact of three factors that are IR, EPS& P/E on Dividend
payout ratio. Dividend payout ratio shows the amount of dividend as a percentage of earning
available for an equity share. It shows the relationship between bank's earnings per share and
dividend provided to shareholders.

1.1.1 Interest ratio
This ratio indicates the financial efficiency of the banks. It indicates the interest payment to
the depositors in relation to the amount of interest earned from the borrowers. In the banking
sector, the interest is the primary source of revenue and expense. A higher interest ratio in the
form of the higher interest expense indicates a declining profit and hence resulting into a lower
dividend payout ratio or conversely, a decreased interest earned also have the same
consequences in the form of declining dividend payout ratio. This ratio indicates the risk of a
bank; whether the bank is capable to pay interest to its depositor or not? The lower the ratio
the fewer burdens on the bank for interest payments. Interest ratio acts as financial efficiency
and a risk measurement tool for banks. Interest ratio is given by dividing interest expense from
interest income
Interest income is the revenue earned by a lender for use of his funds or an investor on their
investment over a period of time. Banks are those financial institutions that accept deposits as
well as lend funds. Banks receive revenue in the form of interest by lending funds to those
who need it.
Interest expense is the cost incurred by an entity (such as banks) for borrowed funds.
1.1.2 Earning per share
Earnings per share (EPS) are the portion of a company's profit allocated to each outstanding
share of common stock. The earnings per share are a useful measure of profitability, and when
compared with EPS of other similar companies, it gives a view of the comparative earning
power of the companies. EPS, when calculated over a number of years, indicates whether the
earning power of the company has improved or deteriorated. Investors usually look for
companies with steadily increasing earnings per share.
Growth in EPS is an important measure of management performance because it shows how

much money the company is making for its shareholders, not only due to changes in profit but
also after all the effects of issuance of new shares (this is especially important when the
growth comes as a result of acquisition). Lev (1989) defines Earnings as the “bottom line” or
“net income” and the single most important item in the firm’s financial statements. They

indicate the extent to which a company has engaged in value-added activities. Lev (1989) in
fact points out that earnings are a signal that helps direct resource allocation in the capital
markets. An increase in the 2 firm’s earnings represents an increase in company value while a
decrease in earnings represents a decrease in company value. Earnings per Share (EPS) are the
firm’s earnings divided by the number of ordinary shares issued by the firm i.e. it’s the firm’s
net income per unit of ordinary shares issued. Small firms have limited access to additional
capital and therefore retain a higher proportion of earnings for expansion needs (Fama and
French, 2001).
Firms need to carry out effective “earnings management” and at the same time, the executive
needs to understand the effect of the firm’s policies so that they can make the best possible
decisions for the company (Lev, 1989).
1.1.3 Price earnings
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. The price-earnings ratio is also sometimes known
as the price multiple or the earnings multiple.
There is a significant negative relationship between business risk and payout. The P/E ratio
implicitly incorporates the risk of a company's future earnings. Fama and French (1998) argue
that high P/E ratio suggest that investors are expecting higher earnings growth in the future
compared to companies with a lower P/E. High P/E ratio may be associated with low risk and
higher payout ratios, whereas low P/E ratio with high risk and lower payouts ratios. This result
is with a line with the agency theory of dividend policy. It is the price of share the outsider is
paying for each rupee reported by the balance sheet of the banks. It is calculated by dividing
the market value per share by book value per share.
1.2 Statement of problem
The dividend payout policy is one of the most debated topics within corporate finance and
many academics have been trying to find the missing pieces in the dividend puzzle for more
than a half century (Baker, 2009 p.30). But dividends is not a new phenomenon, payouts to
shareholders have been a standard procedure for most companies in hundreds of years (Baker,
6

2009 p.30). However, some of the most successful companies during the last years such as
Apple and Google have chosen not to pay dividends (Ciaccia, 2012). This indicates that it is
possible to be successful without paying dividends, so why do firms pay dividends at all?
This question has been extensively debated and one of the most powerful arguments towards
the impact of dividends was presented by Modigliani and Miller (1961). They stated that
under perfect capital markets without any taxes, transaction costs and other market
imperfections, the company value is independent of the dividend policy. Instead the firm value
is solely depended of the earning power of the company’s assets and its investment policy and
not by how its profits are distributed to shareholders (Modigliani & Miller, p.414). If this
would be the case, no companies would pay dividends since it does not create any additional
value for the shareholders and no further research regarding dividends would be necessary.
This is contrary to the view of Brealey et.al (2008 p.973) who has written one of the most
influential undergraduate textbooks in corporate finance. They state that the dividend payout
controversy is one of the ten major unsolved problems in corporate finance and further
research within the area is crucial in order to increase the understanding of the subject.
In the real world disregarding the assumptions made by Modigliani and Miller (1961) various
academics have argued that dividends have an impact on the company’s value. One of the first
studies who claimed that dividends play a major role was presented by Lintner (1956). The
study basically concluded that dividends are determined by a target payout level which
depends on the company’s long term earnings. Lintner’s research was supported by Gordon
(1959) who stated that the shareholders prefer dividends rather than capital gains. If this is
true, the company’s dividend payouts are of major importance both to shareholders and
managers since it contributes to a higher value and shareholders would be willing to pay a
higher price for stocks that pay dividends.
If dividends affect the value of the company it is of importance that the company’s
stakeholders are aware of the factors that affect the dividend payouts. Various studies have
been conducted in order to determine the company factors that influence the dividend payouts.
According to Jensen (1986), the free cash flow is a major determinant of the dividend payouts.

Jensen states that this is due to the agency costs connected to free cash flows and shareholders
prefer cash payments in the form of dividends rather than to keep the free cash flow within the
company. Managers should therefore pay excessive free cash flows as dividends in order to
reduce the agency costs. But free cash flow is far from being the only factor that may affect
the company’s dividend payouts. Another famous study was presented by Miller and Rock
(1985) who argued that dividends provide a signal to investors that the company’s profitability
will increase in the future. Consequently, the company’s growth may according to Miller and
Rock be an important determinant of the dividend payouts. These examples reveal two
company factors that may have an impact on the dividend payouts but they are of course not
the only factors that influence the dividend payouts.
A lot of research in various countries has also been conducted in order to describe the
relationship between a number of factors and the company’s dividend payouts to shareholders.
But even though many studies have been conducted, the results indicate that there are some
differences between countries regarding which factors that have an impact on dividend
payouts. To my knowledge, few studies regarding the factors of dividend payouts have been
conducted in Nepal and they are not up to date. Therefore, I have investigated the some the
factors that may provide an impact on the dividend payouts.
1.3 Purpose of the study
The following are the objective of the study:
1) To assess the impact of EPS, IR, P/E on dividend payout.
2) To observe the relationship between the dependent and independent variables used in this
study.
1.4 Significance of the study
Dividend plays a crucial role in every company and dividend payout policy is one of the most
important decisions that need to be taken by the organization. This might prove to give

necessary and important information to these selected sample banks. The shareholders and
personnel’s of the organization may take benefits from this study.
1.5 Review of related literature
A literature review is an evaluative report of information found in the literature related to your
selected area of study. Literature review consists of a review of finance theories related to the
study, literature as derived from research work by other researchers, some general literature to
aid in further understanding the purpose and a summary.
1.5.1 Theoretical Review
Dividend Theories
Over the time various theories of dividend have emerged; some of the main theories are as
follows:
The Residual Theory of Dividend Policy
The residual theory of dividend policy holds that the firm will only pay dividend from residual
earnings, that is dividends should be paid only if funds remain after the optimum level of
capital expenditures is incurred i.e. all suitable investment opportunities have been financed.
With a residual dividend policy, the primary focus of the firm is on investments and hence
dividend policy is a passive decision variable. The value of a firm is a direct function of its
investment decisions thus making dividend policy irrelevant.
Dividend Irrelevancy Theory, (Miller & Modigliani, 1961)
The dividend irrelevancy theory asserts that dividend policy has no effect on either the price of
the firm or its cost of capital.
Dividend Irrelevance Arguments Dividend policy does not affect share price because the
value of the firm is a function of its earning power and the risk of its assets. If dividends do
affect value, it is only due to:
a) Information effect: The informational content of dividends relative to management's

earnings expectations
9

b) Clientele effect: A clientele effect exists which allows firms to attract shareholders whose
dividend preferences match the firm's historical dividend payout patterns.
The Bird in the Hand Theory, (John Lintner 1962 and Myron Gordon, 1963)
The essence of this theory is not stockholders are risk averse and prefer current dividends due
to their lower level of risk as compared to future dividends. Dividend payments reduce
investor uncertainty and thereby increase stock value. This theory is based on the logic that
what is available at present is preferable to what may be available in the future'. Investors
would prefer to have a sure dividend now rather than a promised dividend in the future (even
if the promised dividend is larger). Hence dividend policy is relevant and does affect the share
price of a firm.
The Tax Differential Theory, (B. Graham and D.L. Dodd)
This theory simply concludes that since dividends are taxed at higher rates than capital gains,
investors require higher rates of return as dividend yields increase. This theory suggests that a
low dividend payout ratio will maximize firm value.
Per Cent Retention Theory (Clarkson and Eliot 1969)
Clarkson and Eliot (1969) argued that given taxation and transaction costs dividends are a
luxury that is not afforded by shareholders as well as by companies and hence a firm can
follow a policy of 100 percent retention. Firms can thus avail of new investment opportunities
that would be beneficial to shareholders too.
Percent Payout Theory (Rubner 1966)
Rubner (1966) argued that shareholders prefer dividends and directors and managers requiring
additional finance would have to convince the investors that proposed new investments would
increase their wealth. However, to increase their job security and status in the eyes of the
10

shareholder's companies can adopt 100 percent payout. However, this policy is not followed in
practice.
Agency Cost Theory (Jenson)
Since Jenson and Meckling (1976), many studies have provided arguments that link agency
costs with the other financial activities of a firm. It has been argued that firms pay out
dividends in order to reduce agency costs. Dividend payout keeps firms in the capital market,
where monitoring of managers is available at lower cost. If a firm has free cash flows (Jensen
(1986), it is better off sharing them with stockholders as dividend payout in order to reduce the
possibility of these funds being wasted on unprofitable (negative net present value) projects.
This modern view of dividend policy emphasizes the valuable role of dividend policy in
helping to resolve agency problem and thus in enhancing shareholder value.
Signaling Hypothesis
Signaling Hypothesis The second explanation is the signaling model which argues the
existence of asymmetric information between managers and shareholders. M&M’s model
assumed that in a firm, information is available for insiders and outsiders equally; but
managers may have information relevant to the value of the firm which outside investors do
not have (Robinson, 2006). This information gap explains the way managers use dividends
announcements as a signal which conveys valuable information about the future performance
of the firm to investors. Based on the signaling hypothesis, shareholders may interpret an
increase in dividend payment as a signal of future profitability; hence in a positive reaction,
the share price will rise. In the same way, a decrease in dividend payouts may be considered as
a bad news about future earnings; therefore, the share price may react unfavorably (Al-
Malkawi, 2008). Signaling perspective of dividend policy is supported and cited by many
researchers such as Bhattacharya (1979) and Miller and Rock (1985).
Dividend Payout Ratio vs. Dividend Yield
We are going to conduct a study concerning dividends and it is therefore of major importance
that we use the most relevant measure of dividend in order to get an accurate result. The two
most common measures of dividends are the dividend payout ratio and the dividend yield.
11

Both these methods provide reliable measurements, but they measure dividend payments in
different ways. The dividend payout ratio is defined as the percentage of the company’s
earnings that is distributed to shareholders. As can be seen in the formula below, it only takes
internal factors into considerations and the measurement is therefore independent to external
factors (Penman, 2009 p.264).
DPR= Dividend per share/Earnings per share
In contrast to the dividend payout ratio, the dividend yield is influenced by external factors
since it takes the stock price into consideration (Warren et.al 2011 p.685)
Many scholars have discussed the differences between these two measurements and both have
advantages and drawbacks which may affect the results of the study (Fama & French 1988)
(Lamont 1998) (Friend & Puckett 1964) (McManus et al 2004). Even though dividend payout
ratio and dividend yield share the same numerator in their formulas they take different aspects
into consideration.
Dividend yield=Dividend per share/stock price
Previous studies have revealed that dividend yield and dividend payout ratio is extremely
different and it is therefore important to choose the most relevant measurement since it will
have a major impact on the result. In particular, McManus et.al (2004) emphasizes the
significance of dividend payout ratio over the dividend yield, due to the influence of the
former in explaining the returns over the latter. Moreover, McManus et.al have pinpointed,
that the signaling effect of dividend payout ratios is more informative compared to dividend
yields since it only contains internal company factors (McManus et.al, 2004).
Fama & French (1988) have on the contrary revealed that the dividend yield has an ability to
predict the stock returns and it, therefore, provides more information compared to the dividend
payout ratio, (Fama & French, 1988). In addition, the dividend yield changes as the stock price
changes and the measurement are therefore out of the company’s control since it takes market
factors into consideration (Steven & Jose, 1992). It is difficult to say which of the two
measurements those are best since they explain different aspects of dividends. Which
measurement to choose depends therefore on the purpose of the research and the company
12

selected factors included in the research. If we solely would have included internal or external
company selected factors it would be easy to justify the measurement of dividends. But in
order to include the most relevant measurements, we had to include both internal and external
measurements. Totally we have chosen to include four internal factors and two external which
are affected by the stock price.
Based on the company selected factors and the differences between the two measurements we
have chosen to use the dividend payout ratio in the research. The majority of the previous
studies have also used the dividend payout ratio (Rozeff 1982) (Lloyd 1985) (Amidu & Abor
2006).
1.5.2 Empirical review
In the section below, a sample of previous studies regarding the relationship between a
number of company factors and dividend payments are presented.
Rozeff (1982) conducted a study regarding the determinants of dividends in the United States
and the sample consisted of 1000 US companies from 64 different industries. The sample was
collected from value line investment survey of June 5, 1981. Rozeff tested the correlation
between the dividend payout ratio and a number of company factors. The study reveals that
there is a positive relationship between the number of shareholders and the dividend payout
ratio. Rozeff argues that companies with a larger amount of external shareholders have to pay
higher dividends in order to reduce the agency conflict. The results also indicate that there is a
negative relationship between dividends payout ratios and risk, insider ownership, and growth
(in revenue). The negative relationship between dividends and insider ownership is also
related to the agency conflict since a large part of the share is held by insiders the company
does not have to pay high dividends. Rozeff (1982 p.257) also states that future growth
opportunities have a greater impact on the dividends than past realized growth. Lloyd et.al
(1985) presented another research regarding the relationship between the dividend payout ratio
and the company’s selected factors. Lloyd’s research is based on the study made by Rozeff
(1982) and he wanted to test if Rozeff’s results were applicable during another time period.
Lloyd added size as one additional variable to the tested factors. Lloyd et.al (1985 p.21) argues
that large companies tend to have a better access to capital markets, which makes them less
13

dependent on internally generated funds which in turn contributes to that they are able to pay
higher dividends. This argument is supported by empirical data and it shows a positive
relationship between a firms dividend payments and the size of the company. Apart from size,
Lloyd’s research found the same results as Rozeff and dividend payments are negatively
correlated to risk, insider ownership, and growth (in revenue). Lloyd et.al states that risk is
negatively correlated to dividend payments since riskier companies face higher uncertainty
and therefore chose to retain earnings instead of paying dividends to shareholders.
Holder et.al (1998) presented a study regarding the determinants of dividend policies in the
United States. The sample consisted of 477 US companies and the time period for the data
collection was 1983-1990. The results of the study indicate that there is a positive relationship
between dividend payout ratio and size (log of sales) and the free cash flow. Holder et.al states
that large companies have easier access to capital markets and should, therefore, be able to pay
higher dividends compared to small firms. Companies with high free cash flow also tend to
pay higher dividends and the authors’ states that this supports the agency theory, companies
with larger free cash flow have to pay higher dividends in order to reduce the agency conflict.
A negative relationship was discovered between dividends and risk (standard deviation of
returns), internal ownership and growth (in sales).
Gill et.al (2006) conducted a study in the United States. They argue that it is beneficial for
companies to pay dividends due to a number of reasons; dividends indicate financial
wellbeing, attractive for investors and dividends help to maintain the market price of the stock.
The sample consisted of 266 randomly selected public companies from different industries in
the United States. The company selected factors in the study are: profit (EBIT/Total assets),
cash flow, tax (corporate profit/net profit), growth, market to book value and debt to equity
ratio. There was a positive relationship between dividends and profit and tax and negative
relationship between dividends and growth. However, Gill et.al (2006) argues that the impact
of the profit is industry specific and varies a lot depending on which industry the company is
located. No significant relationship between dividend payments and cash flow, market to book
value and debt to equity ratio could be established. This is contrary to previous research which
has found a rather strong relationship between cash flow and dividends.
14

Amidu and Abor (2006) investigated the relationship between a number of company selected
factors and the dividend payout ratio in Ghana. The sample consists of companies that have
been listed on Ghana stock exchange during 1998-2003 and even though the sample just
consists of 20 companies, they represent 76 percent of all listed firms in Ghana during the time
period. The factors included in the research are profit (EBIT/total assets), risk (variability in
profit), cash flow, tax (corporate profit/net profit), institutional holding, growth (in sales) and
market to book value. Amidu and Abor (2006) found a positive correlation between the
companies’ dividend payout ratios and profitability and cash flow. A positive correlation was
also established between dividends and taxes. The authors state that the result came as a
surprise and it contradicts existing literature. A negative correlation between dividends and
growth (in sales) and market to book value was revealed. There also existed a negative but
insignificant relationship between the dividend payout ratio and risk and institutional holdings.
Hedensted and Raaballe (2006) conducted a study in Denmark regarding the determinants of
dividends. The sample consists of 365 companies that were listed on Copenhagen stock
exchange during 1988-2004. The variables used in the research in order to reveal the
relationship between dividends are: earnings, return on equity, market to book value, leverage
(debt/equity) and size. Hedensted and Raaballe used dividend yield instead of dividend payout
ratio as a measurement of the dividend payments. But they did not use the regular dividend
yield since it is heavily influenced by the stock price and is therefore not a good measurement.
Instead, they used dividend yield with equity measured in fixed market prices. The authors
found a positive relationship between the dividend yield and retained earnings, return on
equity and size. There existed no significant relationship between dividend yield and market to
book value and the firms leverage (debt/equity). As a conclusion, the authors state that the
results of the study support both the agency and the signaling theories of dividends.
Anil and Kapoor (2008) conducted a study among Indian IT-companies and the data was
collected during the period 2000-2006. The authors used five company factors in order to test
the relationship with the company’s dividend payout ratio. The authors state that there is a
positive but insignificant relationship between the dividend payout ratios and the companies’
profit (EBIT/total assets) and taxes. The results indicate that profit is not of major importance
when an IT-company decides to pay dividends. However, the results indicate that there is a
15

strong relationship between cash flow and dividend payments. Anil and Kapoor state that a
good liquidity position is an important factor which influences companies’ dividend payout
ratios. Companies with stable and high cash flows are more likely to pay dividends compared
to companies who have low or unstable cash flows. The author also found an insignificant
negative correlation between dividends and growth and market to book value
Daunfeldt et.al (2009) conducted the only relevant Swedish study that we were able to find.
The main focus of the study is towards the taxation of Swedish companies’ dividend
payments, but it also deals with the determinants of dividends and investigates the relationship
between a number of company selected factors and the dividend yield. Even though the study
was presented in 2009 it is based on data collected during 1991- 1995 from Stockholm stock
exchange and it is therefore not up to date, but we still think that it is important to include a
study from Sweden. A fairly strong positive relationship was established between dividends
and size (logarithm of employees) and the authors’ state that this is due to the higher agency
costs connected to larger companies. A positive but insignificant relationship was established
between dividends and cash flows and earnings. The authors explain the results by stating that
profitable companies should pay higher dividends and the same applies to firms with higher
liquidity (cash flow). However, a negative relationship was established between the market to
book value and the dividend yield. Daunfeldt et.al (2009) states that the negative relationship
can be explained by the fact that firms with growth opportunities pay low dividends in order to
exploit their growth opportunities. But the authors further argue that this is against the
signaling theory since companies with higher growth opportunities should pay higher
dividends in order to inform shareholders about the growth prospects.
Al-Kuwari (2009) conducted a research among companies listed on Gulf-cooperation council

stock exchanges (GCC), which includes six countries at the Arabian Peninsula. The sample
consists of 191 non-financial companies and data from the period 1999- 2003 was collected. A
strong relationship between the companies’ dividend payout ratios and government ownership,
size and profit existed. Al-Kuwari (2009) explains the positive relationship between
government ownership and dividends by stating that a high degree government ownership
makes it easier for a company to attract external funds. With the external funds, the company
may pay additional dividends or make additional investments in profitable projects. Al-Kuwari
16

(2009) also states that larger firms pay additional dividends in order to reduce agency costs
due to the dispersion of the ownership. A strong negative relationship could be established
between the companies leverage (debt/equity) and dividend payout ratio. Al-Kuwari (2009)
explains the result by stating that companies with higher leverage face higher transaction costs
connected to external financing. But no significant relationship between dividend payout ratios
and companies free cash flows, growth and risk (beta) was revealed. Al Shabibi and Ramesh
(2011) presented a study regarding determinants of dividends in the United Kingdom. The
sample consisted of 102 non-financial companies listed on the stock exchange in the United
Kingdom in 2007. Al Shabibi and Ramesh used a large number of company selected factors in
order to determine the relationship with the dividend payments. The result revealed no
significant relationship between dividends and growth, industrial type, tangibility and gearing
ratio. However, a fairly strong relationship was established between the companies’ dividends
and profit, size, and risk. The authors explain the positive relationship with risk by referring to
the signaling theory. They state that riskier firms may want to signal stability and therefore
chose to pay dividends to shareholders.
1.5.3 Concluding remarks
Though many research studies have been undertaken in the field Dividend payout ratio and its
determinants very few studies have been undertaken to find the impact of Interest ratio(IR),
Earning per share (EPS) and Price Earning( P/E) on DPR. It is found that many scholars
haven’t considered interest ratio as one of the main determinants of DPR. In this study, we
examine whether or not IR establishes itself as a core determinant of dividend payout ratio and
provide an impact on dividend payout. Therefore, to fill this gap in the literature and shed
light, the present study attempts to analyze the impact of IR, EPS and P/E with special
reference to the selected bank in Nepal. The main contribution of this study is to make a
financial comparison based on IR, EPS and P/E to determine the market price of the share.
Like any other study, this study is also not without its limitations.
17

1.6 Research Methodology
With a view to attaining the overall objectives of the research, the research has been carried
out following the systematic methodology. The section provides a description of the type
of data and with the description of methods and procedures for analyzing data.
1.6.1 Research Design
The research study is constructed through descriptive as well as explanatory designs. The
explanatory design considers reviewing of past journals, annual reports as well as related
schedules and consultation to suffice the qualitative and quantitative information regarding the
stated objectives. Concurrently, descriptive design comprises a unique approach to this issue
by using the multivariate linear regression model to identify the factors that influenced the
dividend policy of the Nepalese commercial banks to test the theoretical relation between
dividend payout ratio with variables namely Interest ratio, Earning per share, P/E ratio and
their analysis and the practices of these banks.
1.6.2 Data Collection Procedure
This study is based on secondary data. The basic data have been collected from the annual
reports of the selected banks. Other supplementary data and information have been obtained
from various sources such as Nepal Rastra Bank, Nepal stock exchange limited, previous
dissertation, research publication, and relevant websites.
1.6.3 Population and sample
There has been a remarkable development in the banking sector in Nepal. There are altogether
28 commercial banks operating in the country. The list of banks operating in the country is
provided in the appendices.
It will be lengthy, time-consuming and vague while taking all of these institutions into
consideration. The sampling method has been selected to select the banks to study for this
research. The banks that have been sampled for the study are Nabil bank limited, Siddhartha
bank limited and Standard chartered bank Nepal Limited.
18

1.6.4 Data Analysis Tools
This study is quantitative in nature and analysis all the way through is based on the historical
data. Therefore, tools of the study are selected accordingly as demanded by the purpose of the
study and data nature. Specifically, different statistical tools such as; descriptive statistics and
regression equations are adapted for the data analysis. Under the descriptive statistics mean,
standard deviation, the coefficient of variation, skewness, and kurtosis have been used.
Similarly, multivariate linear regression has been used for the analysis of effects by the
variables. In addition, the correlation coefficient between the variables has also been
examined. To analyze the phenomenon, statistical graphics have been used as per the data
nature. In this study, statistical parameters are calculated with the help of computer via Excel,
the data analysis tool pack.
1.6.6 Financial tools
1) Dividend Payout Ratio (DPR)
This ratio shows the amount of dividend as a percentage of earning available for equity share.
It shows the relationship between bank's earnings per share and dividend provided to
shareholders. The ratio increases if the DPS increases faster than EPS, which is expected. DPR
also increases if EPS decreases but this phenomenon is not recommended as this tendency
does not positively explain the financial health of banks. It is calculated by dividing DPS by
EPS.
Dividend payout ratio: Dividend per share (DPS)/Earning per share (EPS)
2) Interest Ratio: This ratio indicates the financial efficiency of the banks. It indicates the
interest payment to the depositors in relation to the amount of interest earned from the
borrowers.
Interest ratio = Interest expense / Interest income
3) Earnings per share: Earnings per share (EPS) is the portion of a company's profit allocated
to each outstanding share of common stock. It reflects the earning power of a company. It
makes easy to compare past and present EPS of the company and compare with competitions.
19

It is calculated by dividing total earnings available to the common shares holders by number
of common shares outstanding.
4) Price Earning ratio (P/E ratio): There is a significant negative relationship between business
risk and payout policy. The P/E ratio implicitly incorporates the risk of a company's future
earnings. Fama and French (1998) argue that high P/E ratio suggest that investors are
expecting higher earnings growth in the future compared to companies with a lower P/E. High
P/E ratio may be associated with low risk and higher payout ratios, whereas low P/E ratio with
high risk and lower payouts ratios. This result is with a line with the agency theory of dividend
policy. It is the price of share the outsider is paying for each rupee reported by the balance
sheet of the banks. It is calculated by dividing the market value per share by book value per
share.
P/E = Market Price per Share (MPS)/ Earning Per Share (EPS)
1.6.7 Statistical Tools
Statistical tools are used to analyze the relationship between two or more variables and to find
how these variables are related. In this study, following statistical tools are used.
Arithmetic mean or average
Arithmetic mean is an average of a given set of data this is divided by the number of
observation/ years. The arithmetic mean (AM) is denoted by X:
Standard Deviation
Standard deviation is the measure of dispersion of a set of data from its mean. It measures the
absolute variability of a distribution; the higher the dispersion or variability, the greater is the
standard deviation and greater will be the magnitude of the deviation of the value from their
mean.
Coefficient of variation (C.V)
A coefficient of variation (CV) is a statistical measure of the dispersion of data points in a data
series around the mean. The coefficient of variation represents the ratio of the standard
20

deviation to the mean, and it is a useful statistic for comparing the degree of variation from
one data series to another, even if the means are drastically different from one another.
C.V = standard deviation/Mean
Coefficient of correlation
Correlation is a statistical tool design to measure the degree of association between two or
more variables. In another word, if the changes in one variable affect the changes in another
variable, then the variable is said to be co-related when it is used to measure the relationship
between two variables, then it is called simple correlation. The coefficient of correlation
measures the degree of relationship between to sets of figures. Among the various methods of
finding out the coefficient of correlation, Karl Pearson's method is applied in the study. The
result of coefficient of correlation always lies between +1 and -1. The formula for the
calculation of the coefficient of correlation between X and Y is given below.
The interpretation of calculated value of correlation coefficient by following way
1. If r = 0, then there is no correlation between variables
2. If r > 0, then there is positive correlation between variables
3. If r < 0, then there is negative relation between variables
4. If r = +1, then there is perfect positive correlation
5. If r = -1, then there is perfect negative correlation
Kurtosis
Kurtosis is a statistical measure that is used to describe the distribution, of observed data
around the mean sometimes referred to as the volatility of volatility. Kurtosis is used in the
statistical field to describe in the trend charts. Kurtosis can be present in a chart with fat tails
and a low, even distribution, as well as be present in a chart with skinny tails and distribution
concentrated toward the mean.
21

Interpretation style of calculated value
1. If K = 3, the distribution is mesokurtic or normal
2. If K > 3, the distribution is leptokurtic
3. If k < 3, the distribution is platykurtic
Skewness
Skewness is asymmetry in a statistical distribution, in which the curve appears distorted or

skewed either to the left or to the right. Skewness can be quantified and define the extent to
which a distribution differs from a normal distribution.
Interpretation of calculated value of the coefficient of skewness
 If Sk(P) = 0, then this shows that the distribution is symmetrical (non -skewed)
 If Sk(P) > 0, then this shows that the distribution is positively skewed or right skewed
 If Sk(P) <0, then this shows that the distribution is negatively skewed or left skewed
Regression analysis
The regression equation to be estimated has therefore been specified as
DPRit=β0+β1IRit+ β2EPSit + β3P/Eit +εit
Where,
DPRit represents Dividend payout ratio of bank I in year t;
IRit represents interest ratio of bank I in year t;
P/Eit represents Price earning ratio of bank i in year t;
EPSit represents Earning per share of bank i in year t;
β0 is the intercept (constant);
22

βn represents the slope which represents the coefficient of changes.
1.7 Limitation of the study
The following are some of the limitations of the study:
1) The output of proposed study cannot be claimed as errorless due to the different limitation
of methodological aspects. The study is entirely based on secondary data of commercial
banks.
2) This study is based on thirteen-year data starting from 2003/04 to 2015/16 A.D
3) Only three commercial banks have been taken for the study.
4) Moreover, the reliability of tools, lack of research experiences and lack of data are the other
limitations of this study.
5) Another limitation is the consideration of only four variables and not a large observation.
Therefore, the precondition of regression may not be fulfilled.
1.8 Organization of the Study
This project report is prepared for the partial fulfillment of the requirements for the degree of
Bachelor of Business Administration. In this report whole chapter is classified into the three
parts.
Chapter I: Introduction section includes context of the study, statement of the problem,
objective of the study, significance of the study, literature review, Research Methodology,
limitation of the study and Organization of the study
Chapter II: Data presentation and analysis section includes organization profile, Data
analysis and major finding of the study.
Chapter III: Conclusion and Action Implications.
23

Chapter-II
Data Presentation and Analysis
This chapter deals with the data presentation and Analysis. Data for Analysis can be obtained
from the different sources and they can be presented as tables or charts like bar diagram,
graphs etc. the methods of data presentation and analysis are used to analyze the given data
and to present them in very finest manner and let the data to present for drawing inferences.
The data collected from the concerned Samples Banks, NRB directives and from various other
sources like libraries, booklets, published reports, journals, internet website are organized and
classified for analysis.
2.1 Organization profile
2.1.1 Introduction to NABIL (Nabil Bank Limited)
Nabil Bank Limited is the nation’s first private sector bank, commencing its business since
July 1984. Nabil was incorporated with the objective of extending international standard
modern banking services to various sectors of the society. Pursuing its objective, Nabil
provides a full range of commercial banking services through its 67 points of representation.
In addition to this, Nabil has presence through over 1500 Nabil Remit agents throughout the
nation.
Nabil, as a pioneer in introducing many innovative products and marketing concepts in the
domestic banking sector, represents a milestone in the banking history of Nepal as it started an
era of modern banking with customer satisfaction measured as a focal objective while doing
business. Operations of the bank including day-to-day operations and risk management are
managed by highly qualified and experienced management team. Bank is fully equipped with
modern technology which includes international standard banking software that supports the
E-channels and E-transactions.
24

Nabil is moving forward with a Mission to be “1st Choice Provider of Complete Financial
Solutions” for all its stakeholders; Customers, Shareholders, Regulators, Communities and
Staff. Nabil is determined in delivering excellence to its stakeholders in an array of avenues,
not just one parameter like profitability or market share. It is reflected in its Brand Promise
“Together Ahead”. The entire Nabil Team embraces a set of Values “C.R.I.S.P”, representing
the fact that Nabil consistently strives to be Customer Focused, Result Oriented, Innovative,
Synergistic and Professional.
2.1.2 Introduction to SBL (Siddhartha Bank Limited)
Siddhartha Bank Limited (SBL), established in 2002 and promoted by prominent personalities
of Nepal, today stands as one of the consistently growing banks in Nepal. While the promoters
come from a wide range of sectors, they possess immense business acumen and share their
valuable experiences towards the betterment of the Bank.
Within a short span of time, Siddhartha Bank has been able come up with a wide range of
products and services that best suits its clientele. Siddhartha Bank has been posting growth in
its portfolio size and profitability consistently since the beginning of its operations. The
management of the Bank has been thoroughly professional.
Siddhartha Bank has been able to gain significant trust of the customers and all other
stakeholders to become one of the most promising commercial banks in the country in less
than 15 years of its operation. The Bank is fully committed towards customer satisfaction. The
range and scope of modern banking products and services the Bank has been providing is an
example to its commitment towards customer satisfaction. It is this commitment that has
helped the Bank register quantum growth every year. And the Bank is confident and hopeful
that it will be able to retain this trust and move even further towards its mission of becoming
one of the leading banks of the industry.
2.1.3 Introduction to SCB (Standard chartered Bank limited)
Standard Chartered Bank Nepal Limited has been in operation in Nepal since 1987 when it
was initially registered as a joint-venture operation. Today the Bank is an integral part of
25

Standard Chartered Group having an ownership of 70.21% in the company with 29.79%
shares owned by the Nepalese public. The Bank enjoys the status of the largest international
bank currently operating in Nepal. Standard Chartered has a history of over 150 years in
banking and operates in many of the world's fastest-growing markets with an extensive global
network of over 1700 branches (including subsidiaries, associates and joint ventures) in over
70 countries in the Asia Pacific Region, South Asia, the Middle East, Africa, the United
Kingdom and the Americas. As one of the world's most international banks, Standard
Chartered employs almost 87,000 people, representing over 115 nationalities, worldwide.
This diversity lies at the heart of the Bank's values and supports the Bank's growth as the
world increasingly becomes one market. With 15 points of representation, 23 ATMs across
the country and with more than 450 local staff, Standard Chartered Bank Nepal Ltd. is in a
position to serve its clients and customers through an extensive domestic network. In addition,
the global network of Standard Chartered Group gives the Bank a unique opportunity to
provide truly international banking services in Nepal.
Standard Chartered Bank Nepal Limited offers a full range of banking products and services
to a wide range of clients and customers encompassing individuals, mid-market local
corporate, multinationals, large public sector companies, government corporations, airlines,
hotels as well as the DO segment comprising of embassies, aid agencies, NGOs and INGOs.
The Bank has been the pioneer in introducing 'customer focused' products and services in the
country and aspires to continue to be a leader in introducing new products in delivering
superior services. It is the first Bank in Nepal that has implemented the Anti-Money
Laundering policy and applied the 'Know Your Customer' procedure on all the customer
accounts.
26

2.2 Data presentation
2.2.1 Data presentation of DPR

Table 2.1
Data analysis of DPR of NABIL, SBL and SCB
Year DPR of NABIL DPR of SBL DPR of SCB
2003/04 70.18 0 76.62
2004/05 66.36 0 83.83
2005/06 65.78 0 79.61
2006/07 102.13 99.43 77.67
2007/08 92.33 91.32 98.54
2008/09 79.62 68.98 90.91
2009/10 89.05 45.61 90.14
2010/11 42.45 79.66 71.93
2011/12 71.8 41.25 82.64
2012/13 68.32 74.19 76.1
2013/14 85.59 59.95 78.66
2014/15 65.36 55.73 77.04
2015/16 75.92 117.38 76.34
Mean 74.99 56.42 81.54
S.D 15.16 38.41 7.51
C.V 0.2021 0.6808 0.0921
Source: Annual reports of NABIL, SBL, SCB
As depicted in table 2.1 the average dividend payout ratio of the standard chartered bank is the
highest among NABIL and SBL. SCB limited has an average of 81.54 percent of dividend
payout ratio yearly. The standard deviation of DPR shows the fluctuation of the values from
the mean. S.D of SBL is 38.41 percent and is the highest among the rest of the sample. The
coefficient of variation (CV) represents the ratio of the standard deviation to the mean. CV of
SBL is the highest i.e. 68.08 percent among the rest of the sample.
Figure 2.1 gives the glimpse of the trend of DPR of NABIL, SBL and SCB
27

140
120
100
80
60
DPR 40
NABIL
20
SBL SCB
0
Year
Figure 2. 1 Trend chart of DPR of NABIL, SBL and SCB
2.1.2 Data presentation of IR

Table 2. 2
Data analysis of Interest ratio of NABIL, SBL and SCB
Year IR of NABIL IR of SBL IR of SCB
2003/04 20.84 63.01 14.72
2004/05 19.31 46.32 17.63
2005/06 25.21 50.88 21.02
2006/07 31.20 60.43 23.20
2007/08 32.83 56.46 23.90
2008/09 36.50 72.77 17.91
2009/10 42.55 70.53 18.67
2010/11 49.2 70.17 23.71
2011/12 44.66 59.42 25.08
2012/13 31.52 51.77 15.88
2013/14 26.47 50.76 13.31
2014/15 30.11 54.53 13.24
2015/16 20.42 52.53 14.72
Mean 31.60 58.43 18.69
S.D 9.51 8.54 4.27
C.V 0.3011 0.1462 0.2283
As depicted in table 2.2 the average dividend interest ratio of SBL is the highest among the
two banks. SBL has an average of 58.42 percent of interest ratio yearly. The standard
deviation of IR shows the fluctuation of the values from the mean. S.D of NABIL is 9.51
28

percent and is the highest among the rest of the sample. The coefficient of variation (CV)
represents the ratio of the standard deviation to the mean. CV of NABIL is the highest i.e.
30.11 percent among the rest of the sample.
Figure 2.2 gives the glimpse of the trend of IR of NABIL, SBL and SCB
80
70
60
50
IR 40
30
20
NABIL
10
SBL SCB
0
Year
Figure 2.2 Trend chart of IR of NABIL, SBL and SCBL
29

2.1.3 Data presentation of EPS
Table 2. 3
Data and descriptive statistics of EPS of NABIL, SBL and SCB
Year EPS of NABIL EPS of SBL EPS of SCB
2003/04 92.61 -8.89 143.55
2004/05 105.49 20.08 143.14
2005/06 129.21 13.05 175.84
2006/07 137.08 15.88 167.37
2007/08 115.86 17.29 131.92
2008/09 113.44 22.89 109.99
2009/10 83.81 21.99 77.65
2010/11 70.67 19.82 69.51
2011/12 83.23 20.41 72.6
2012/13 91.05 29.8 65.7
2013/14 76.12 38.63 65.47
2014/15 57.24 37.77 57.38
2015/16 59.27 41.53 45.96
Mean 93.46 22.32 102.006
S.D 25.38 13.13 45.09
C.V 0.2715 0.5885 0.4420
As depicted in table 2.3 the average EPS of SCB is the highest among the two banks. SCB has
an average of Rs102.006 of EPS yearly. The standard deviation of EPS shows the fluctuation
of the values from the mean. S.D of SCB is 45.09 percent and is the highest among the rest of
the sample. The coefficient of variation (CV) represents the ratio of the standard deviation to
the mean. CV of SBL is the highest i.e. 58.85 percent among the rest of the sample.
Figure 2.3 gives the glimpse of the trend of EPS of NABIL, SBL and SCB
30

200
150
100
NABIL
EPS SBL SCB
50
-50
Year
Figure 2.3 Trend chart of EPS of NABIL, SBL and SCB
2.1.4 Data presentation of P/E
Table 2. 4
Data and descriptive statistics of P/E ratio of NABIL, SBL and SCB
Year PE of NABIL PE of SBL PE of SCB
2003/04 10.8 0 12.16
2004/05 14.27 0 16.38
2005/06 17.34 27.59 21.47
2006/07 36.84 48.98 35.25
2007/08 45.53 63.04 51.77
2008/09 43.19 43.7 54.64
2009/10 28.45 20.19 42.23
2010/11 17.72 13.62 25.9
2011/12 16.21 16.91 24.78
2012/13 19.08 10.07 27.7
2013/14 33.38 20.97 42.75
2014/15 33.37 17.95 33.86
2015/16 39.55 20.93 78.33
Mean 27.36 23.38 35.94
S.D 11.98 18.52 18.11
C.V 0.4380 0.7922 0.5040
31

As depicted in table 2.4 the average P/E ratio of SCB is the highest among the two banks. SCB
limited has an average of 35.94 percent of P/E ratio yearly The standard deviation shows the
fluctuation of the values from the mean. S.D of SBL is 18.52 percent and is the highest among
the rest of the sample. The coefficient of variation (CV) represents the ratio of the standard
deviation to the mean. CV of SBL is the highest i.e. 79.22 percent among the rest of the
sample.
Figure 2.4 gives the glimpse of the trend of P/E ratio of NABIL, SBL and SCB
90
80
70
60
50
P/E ratio 40
NABIL
30
SBL SCB
20
10
0
Year
Figure 2. 4 Trend chart of P/E ratio of NABIL, SBL and SCB
32

2.2 Descriptive statistics of study variables
In this section mean, standard deviation, kurtosis, skewness and min-max of variables (DPR,
IR, EPS&P/E is analyzed. On the basis of data, combine analysis has been done.
Table 2. 5
Descriptive statistics of study variables
Variable Mean S.D Coefficient Kurtosis Skewness Minimum Maximum
all sample of
variation
DPR 70.98 25.93 0.3653 2.59 -1.46 0 117.38
IR 36.24 18.40 0.5076 -1.091 0.488 13.248 72.77
EPS 72.60 47.005 0.6474 -0.64 0.41 -8.89 175.84
P/E 28.89 16.89 0.5848 0.68 0.75 0 78.33
Table 2.5 depicts that the average dividend payout ratio of Nepalese commercial bank is
70.98%.The standard deviation is 25.93% and it represents variation in DPR. The coefficient
of variation (CV) represents the ratio of the standard deviation to the mean. The C.V of DPR
is 36.53%.The kurtosis is a statistical measure that is used to describe the distribution, of
observed data around the mean sometimes referred to as the volatility of volatility. The
kurtosis of 2.59 represents that the distribution is platykurtic. Platykurtic describes a statistical
distribution with thinner tails than a normal distribution. Skewness is asymmetry in a
statistical distribution, in which the curve appears distorted or skewed either to the left or to
the right. Skewness can be quantified and define the extent to which a distribution differs from
a normal distribution. The skewness of -1.46 represents that the distribution is negatively
skewed or left skewed. The maximum and minimum represents the highest and lowest value
of the variable of the selected sample. The maximum DPR was 117.38% and minimum DPR
was 0%
Similarly, the average interest ratio of commercial banks in Nepal is 36.24%. The interest ratio
indicates the financial efficiency of banks. It indicates the interest payment to the depositors in
33

relation to the amount of interest earned from the borrowers. In the banking sector, the interest
is the primary source of revenue and expense. A higher interest ratio in the form of the higher
interest expense indicates a declining profit and hence resulting into a lower dividend payout
ratio or conversely, a decreased interest earned also have the same consequences in the form
of declining dividend payout ratio. The standard deviation is 18.40 and it represents variability
in IR. The coefficient of variation (CV) of IR is 50.76 percent. Kurtosis of -1.091 represents
that the distribution is less peaked and it has less fat tails than the normal distribution.
Skewness of 0.488 represents that the distribution is positively skewed or right-skewed. The
maximum IR ratio was 72.77% and minimum IR was 13.248%
Likewise, the EPS represents the profitability of the firm. EPS has a positive relationship with
the DPR. Higher profit represents higher dividend payouts. The average EPS is Rs.72.60.It’s
S.D. is 47.005 percent. The coefficient of variation (CV) of EPS is 64.74 percent. Kurtosis is -
0.64 which means that the distribution is less peaked and it has less fat tails than the normal
distribution and skewness is 0.4 which means that the distribution is positively skewed.
Maximum EPS is 175.84 and the minimum EPS is (8.89).
In a similar manner, Higher P/E ratio indicates profitability. Hence, higher the P/E ratio higher
will be the dividend payout. The average P/E ratio of commercial banks in Nepal is
28.89%.It’s S.D. is 16.89%. The coefficient of variation (CV) of P/E is 58.48 percent. Kurtosis
is 0.68 and skewness is 0.75. Maximum P/E is 78.33% and minimum P/E is 0%.
34

2. 3 Result from correlation analysis
One of the most commonly used measurements, in order to test the relationship between a
number of variables, is correlation coefficient (Keller, 2005, p.602).
Table 2. 6
Correlation Analysis
Variables DPR IR EPS P/E
DPR 1
IR -0.34 1
EPS 0.45 -0.6829 1
P/E 0.50 -0.24 0.04 1
Correlation coefficients vary between -1 and 1. Negative values indicate negative correlation,
and positive values indicate positive correlations. Values close to zero reflect the absence of
correlation. The above table shows the correlation between DPR, IR, and EPS&P/E. The table
depicts that there is a negative relation between DPR and IR. Here relation between DPR and
IR is -0.34. A higher interest ratio in the form of the higher interest expense indicates a
declining profit and hence resulting into a lower dividend payout ratio or conversely, a
decreased interest earned also have the same consequences in the form of declining dividend
payout ratio. This ratio indicates the risk of a bank i.e. whether the bank is capable to pay
interest to its depositor or not. The lower the ratio the fewer burdens on the bank for interest
payments. Interest ratio acts as financial efficiency and a risk measurement tool for banks. The
table shows that the interest payments are negatively correlated with dividend payout.
The table also elucidates that there is a positive relation between DPR and EPS. Here relation
between DPR and EPS is 0.45. EPS indicates profitability of the banks. When the profitability
is higher, the banks offer higher payout ratio to its shareholders. Therefore, when EPS is high
the dividend payout ratio will be higher.
Likewise, the relation between DPR and P/E ratio is 0.5. It means that the relationship is
positive. When the P/E ratio is high the dividend payout ratio will be higher and vice versa.
35

2.4 Result from the regression model
Regression analysis is set of statistical process for estimating the relationship between
variables. It includes many techniques for modeling and analyzing several variables when the
focus is on the relationship between dependent variables and independent variables. For the
finding result regression analysis was conducted without control variables.
Test of significance was carried out for all variables studied using the t-test at 95% level of
significance.
From the observation,
Any p-value that is greater than 0.05 will be deemed to have a significant relationship with the
dependent variable else the relationship is considered insignificant
The standardized coefficient and the t-statistic indicate the strength of the relationship between
the dependent and independent variables.
The adjusted R square measures the degree of variability of the dependent variable due to the
change in the independent variable.
2.4.1 Analysis of Regression Model
Table 2. 7
Regression analysis
Variable Coefficient t stat p-value
Constant 24.68 1.41 0.1671
IR 0.1393 0.5486 0.5867

EPS 0.2656 2.7443 0.0095
P/E 0.7600 3.7508 0.00063
2 2
Multiple R=0.6588,R =0.4341 ,Adjusted R =0.3856 ,Standard Error=20.32 , F-Stat=8.94 ,Sig-
F=0.0001546 , N = 39
Multiple R is 0.6588.The Multiple R is the correlation coefficient. It tells you how strong
the linear relationship is. For example, a value of 1 means a perfect positive relationship and a
36

value of zero means no relationship at all. R2 is the coefficient of determination. It tells us how
many points fall on the regression line. R2 is 43.41 percent which means that 43.41 percent of
the variation of y-values around the mean is explained by the x-values. In other words, 43.41
percent of the values fit the model. Adjusted R2 is 0.3856. The adjusted R-squared compares
the descriptive power of regression models that include diverse numbers of predictors. The
standard error of the regression is 20.32. It is an estimate of the standard deviation of the error
μ. This is not the same as the standard error in descriptive statistics. The standard error of the
regression is the precision that the regression coefficient is measured; if the coefficient is large
compared to the standard error, then the coefficient is probably different from 0. The statistic
in the table shows that there is a perfect model fit with an F statistics of 8.94, significant at
95%. This means that the model specification is correct and that the selected independent
variables are determinants of Dividend payout ratio. The obtained p-value is 0.0001546. It is
less than 0.05 and is significant. That means a selected variable is affected by the independent
variables. The number of observations taken in the sample was 39.
The regression result shows the positive intercept 24.68.The intercept is known as constant.
The size of the coefficient for independent variable gives the size of the effect on the
dependent variable. The sign on the coefficient (positive or negative) gives the direction of the
effect.
2.5 Major Finding of the study
Interest ratio, Earning per share and P/E ratio are some of the factors that influence the
dividend payout of commercial banks in Nepal. The objective of the study was to assess the
impact of these factors on dividend payout of Nepalese commercial banks.
The major findings of the research from the above presentation and analysis have been
highlighted below.
1) There is a negative relationship between IR and DPR. IR represents the financial efficiency
of the banks. Therefore, when the interest ratio is higher the dividend payout is lower and vice
versa.
37

2) There is a positive relationship between EPS and DPR. EPS is the indication of profitability
of the bank. Therefore, when the EPS of the bank is higher, the dividend payout ratio is also
higher and vice versa.
3) There is a positive relationship between P/E ratio and DPR. High P/E ratio may be
associated with low risk and higher payout ratios, whereas low P/E ratio with high risk and
lower payouts ratios. This result is with a line with the agency theory of dividend policy.
Therefore, when the P/E ratio of the bank is higher, it is decided by the management of the
bank to increase the DPR.
4) The regression analysis showed that there is a significant relationship between the
dependent and dependent variables used in the study.
5) The trend chart variables showed that there is irregular pattern in the dividend distribution
of the selected banks in the study. It also showed that SCB had the lowest IR in all the selected
thirteen years for this study among the other selected banks for the study. The burden for
interest payments will be lower if the banks have lower IR. There weren’t any huge change in
trends of IR for all the selected banks in this study. The trend chart of P/E ratio showed that
every bank had upward trend at the beginning followed by downward trend and some near
stability in the middle. The trend chart of EPS showed there is a similarity in trends between
NABIL and SCB.
38

Chapter III
Conclusion and Action implication
3.1 Conclusion
Dividends refer to that portion of a firm’s net earnings which are paid out to the shareholders.
Dividend serves as a simple, comprehensive signal of management’s interpretation of the
firm’s recent performance and its future prospects. Dividend payout ratio shows the amount of
dividend as a percentage of earning available for equity share. There are several factors that
influence the dividend payout policy. The study was about the influence of factors like IR,
EPS and P/E ratio on dividend policy. Thirteen-year data was taken each of three commercial
banks. Multivariate linear regression and correlation analysis were performed to analyze the
association and strengths of the relationship between the dependent variable and independent
variables. From the analysis, it was found that there is a relationship between DPR and the
mentioned factors. Interest ratio possesses negative association with DPR. If the banks have
too many interest payments to make and receive a very few interest revenue then it will result
in less dividend payment. EPS and P/E both possess positive association with DPR. A stronger
position of P/E ratio and greater EPS will result in greater payment of Dividends. The result
obtained from the regression analysis showed that there was a significant relationship between
the dependent and independent variables. With the above findings, it can be concluded that
there are differences in the dividend payout practice of every bank. There is no uniformity in
distribution of dividend by the commercial banks. There is fluctuation in the dividend.
Different banks are following policies maintaining their own rules and regulations. It is well-
known fact that distribution of dividend in the Nepalese companies is unclear and uncertain.
The trend analysis of DPR of the sample banks showed that there was no uniformity in
distribution of dividend. Banks have been found to adopt unstable dividend payment policies.
39

3.2 Action implication
This study is focused on the influence of some of the factors (IR, EPS, P/E ratio) on dividend
payout policy of commercial banks on Nepal. From the above data analysis, it is concluded
that the above-mentioned factors influence the DPR to some extent. However, the above-
mentioned factors are not the sole determinants of dividend payout policy. This study has
taken only three of the possible factors which were believed to have some influence on the
dividend payout decision. There are many other factors which are believed to have the same or
greater influence on dividend payout.
The results and the analysis have revealed some additional questions which need to be
answered in future studies. More factors than the ones included in the research should have an
impact on the dividend payout ratio. It would, therefore, be interesting to conduct a similar
study with different factors that may provide an impact on dividend payout ratio.
The dependent variable in the study was the dividend payout ratio. However, a suggestion for
future studies is to replace the dividend payout ratio and instead use the dividend yield as the
dependent variable. Most previous studies have also used the dividend payout ratio and it
would, therefore, be interesting to see the impact of a number of company selected factors on
the dividend yield.
A time period of thirteen years has been used in this study and for future research we
recommend to use a longer time period. It would be interesting to see whether the results from
this study are applicable if a study is conducted over a longer period of time or during another
time period.
40

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APPENDICES
Appendix I
List of Commercial Banks in Nepal
S.N. Name of Commercial Banks Established year (A.D)
1 Laxmi Bank Limited 2002
2 Siddhartha Bank Limited 2002
3 Nepal Bank Limited 1937
4 RstriyaBanijya Bank Limited 1966
5 Agriculture Development Bank 2006
6 Nabil Bank Limited 1984
7 Nepal Investment Bank Limited 1986
8 Standard chartered bank Nepal Limited 1987
19 Himalayan Bank Limited 1993
10 Nepal SBI Bank Limited 1993
11 Nepal Bangladesh Bank limited 1993
12 Everest Bank Limited 1994
13 Kumari Bank Limited 2001
14 Bank of Kathmandu Limited 1995
15 Nepal credit and commerce Bank limited 1996
16 Global IME Bank Limited 2007
17 Citizens Bank international limited 2007
18 Prime Commercial Bank Limited 2007
19 Sunrise Bank Limited 2007
20 NMB Bank Limited 2008
21 NIC Asia Bank Limited 1998
22 Machhapuchhre Bank Limited 2000
23 Mega Bank Nepal Limited 2010
24 Civil Bank Limited 2010
25 Century Bank Limited 2011
26 Sanima Bank limited 2012
27 Janta Bank Limited 2010
28 Prabhu Bank limited 2016
Source: https://www.nrb.org.np/bfr/pdffiles/List_of_BFIs_Jan_2017_English.pdf

Appendix II
DPS, Int.In, Int.E of SCB
year DPS(in Rs.) Int.In(in %) Int.exp(in%)
2003/04 110 8.83 1.3
2004/05 120 7.43 1.31
2005/06 140 6.23 1.31
2006/07 130 7.11 1.65
2007/08 130 6.65 1.59
2008/09 100 8.54 1.53
2009/10 70 8.78 1.64
2010/11 50 11.05 2.62
2011/12 60 11.16 2.8
2012/13 50 9.76 1.55
2013/14 51.5 9.31 1.24
2014/15 44.21 8.68 1.15
2015/16 35.09 6.86 1.01
Source: Annual reports

Appendix III
DPS, Int.In, Int.E of
2003/04 0 7.3 4.6
2004/05 0 7.49 3.47
2005/06 0 7.37 3.75
2006/07 15.79 6.37 3.85
2007/08 15.79 6.96 3.93
2008/09 15.79 8.41 6.12
2009/10 10.03 10.86 7.66
2010/11 15.79 13.01 9.13
2011/12 8.42 13.26 7.88
2012/13 22.11 11.53 5.97
2013/14 23.16 10.4 5.28
2014/15 21.05 8.49 4.63
2015/16 48.75 6.89 3.62

Appendix
DPS, Int.In, Int.E of NABIL

2003/04 65 9.45 1.97
2004/05 70 8.7 1.68
2005/06 85 8.29 2.09
2006/07 140 8.14 2.54
2007/08 106.97 8.04 2.64
2008/09 90.32 8.82 3.22
2009/10 74.63 10.41 4.43
2010/11 30 12.5 6.15
2011/12 59.75 12.55 5.74
2012/13 62.2 11.64 3.67
2013/14 65.15 10.16 2.69
2014/15 37.41 8.5 2.56
2015/16 45 8.08 1.65

Finance Ashok Bba Summer Project Report

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Finance Ashok - BBA summer project report

Bachelors of Business Administration (Tribhuvan Vishwavidalaya)

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A Summer Project Report Submitted to

Faculty of Management, Tribhuvan University

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Signature of the supervisor

Name: Bijaya Goppal Shrestha

Date: May, 2018

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Head, Research Department ………………

Member (Supervisor) ………………

Member (External Expert) ………………

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Date: May, 2018

Name: Ashok Regmi

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Certificate from Supervisor.......................................................................................................................ii

1.1 Context information.........................................................................................................................1

1.1.1 Interest ratio...............................................................................................................................5

1.1.2 Earning per share......................................................................................................................5

1.1.3 Price earnings...........................................................................................................................6

1.3 Purpose of the study........................................................................................................................8

1.4 Significance of the study.................................................................................................................8

1.5 Review of related literature.............................................................................................................9

1.5.1 Theoretical Review...................................................................................................................9

1.5.2 Empirical review....................................................................................................................13

1.5.3 Concluding remarks................................................................................................................17

1.6 Research Methodology..................................................................................................................18

1.6.1 Research Design.....................................................................................................................18

1.6.2 Data Collection Procedure......................................................................................................18

1.6.3 Population and sample............................................................................................................18

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1.6.6 Financial tools........................................................................................................................19

1.6.7 Statistical Tools......................................................................................................................20

1.7 Limitation of the study..................................................................................................................23

1.8 Organization of the Study........................................................................................................23

Chapter-II Data Presentation and Analysis.......................................................................................24

2.1 Organization profile.......................................................................................................................24

2.1.1 Introduction to NABIL(Nabil Bank Limited)........................................................................24

2.1.2 Introduction to SBL(Siddhartha Bank Limited).....................................................................25

2.1.3 Introduction to SCB(Standard chartered Bank limited).........................................................25

2.2 Data presentation...........................................................................................................................27

2.2.1 Data presentation of DPR...........................................................................................................27

2.1.2 Data presentation of IR...........................................................................................................28

2.1.3 Data presentation of EPS........................................................................................................30

2.1.4 Data presentation of P/E.........................................................................................................31

2.2 Descriptive statistics of study variables........................................................................................33

2. 3 Result from correlation analysis...................................................................................................35

2.4 Result from the regression model..................................................................................................36

2.4.1 Analysis of Regression Model................................................................................................36

2.5 Major Finding of the study............................................................................................................37

Chapter III Conclusion and Action implication................................................................................39

3.2 Action implication.........................................................................................................................40

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Table 2.1 Data analysis of DPR of NABIL, SBL, SCB..............................................................27

Table 2.2 Data analysis of IR of NABIL, SBL, SCB..................................................................28

Table 2.3 Data analysis of EPS of NABIL, SBL, SCB...............................................................30

Table 2.4 Data analysis of P/E ratio of NABIL, SBL, SCB.......................................................31