Finance Ashok - BBA summer project report PDF

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BBA summer project report...

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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

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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: ………………..

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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

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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.

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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 1.1.1Interest 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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1.6.4 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

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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

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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

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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

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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.

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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

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 (paidup 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. 3

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.

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1.1.1Interest 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 lo...