Dividend Policy of

Everest Bank Limited

A Thesis Proposal

By

RAM KHADKA

TU REG NO.:

Orient College

Submitted To:

The faculty of management

Tribhuvan University

Kathmandu

In partial fulfillment of the requirements for the degree of Bachelor

of Business studies (B.B.S)

Kathmandu, Nepal

1 Introduction
1.1 Background of Study

Commercial banks are privately owned financial institution which accepts

demand and time deposits, make loans to individuals and organizations.
To provide services such as documentary collections, international
banking, trade financing since a large portion of a commercial banks
deposit is payable on demand. It prefer to make short-term loans instead
of the long-term ones (which are handed by organizations such
development finance companies and home mortgage companies).
(Business Dictionary)

The banking system is the structural network of institutions that offer

financial services within a country where, corporate finance is concerned
with the managerial decisions about dividend policy of a firm. The concept
of dividend policy has been heavily focused by financial scholars for the
past decades. Dividend policy is the policy used by a company to decide
how much it will pay out to shareholders in dividend. Taking financial
indicators of Everest bank for the period of 2010/2011 to 2015/2016, the
study attempts to elucidate the dividend practices of commercial banks of
Nepal. About by controversies and unpredictability, this study concludes
that commercial banks of Nepal do not show uniform trend of dividend
policy. Dividend policy practiced by commercial banks of Nepal is neither
fully explained by residual theory nor stable theory with the developments
of financial institutions in Nepal, they need to follow a robust method of
dividend policy.
(NASC, 2017)

Dividend policy is concerned with financial policies regarding paying cash

dividend in the present or paying an increased dividend at a later stage.
Whether to issue dividend, and what amount is determined mainly on the
basis of the companys inappropriate profit (excess cash) and influenced
by the companys long-term earning power. When cash surplus exists and
is not needed by the firm, then management is expected to pay out some
or all of those surplus earnings in the form of cash dividends or to re-
purchase the companys stock through a share buyback program.
1.2 Statement of Problem/Research Question
Shareholders and potential investors look into a companys capability to
initiate a dividend. A sound dividend policy is important for investors who
value the profit stability of the company.
i. Why companies tend to pay dividends to its shareholders?
ii. How dividend indicates about the overall health of the company?
iii. What are the factors affecting the dividend policies?

1.3 Objectives of study

The importance of dividend policy can be accessed on the basis of its
effects on companies and shareholders. Companies tend to maintain the
balance between debt and equity in their capital structure. Hence, they pay
dividends from the residual earnings often meeting all operating and capital
expenditures. Dividends are important to shareholders and potential
investors since they indicate the companys financial health. Dividends are
also attractive for shareholders and potential investors who are looking to
secure current income.

1. Dividend policy can play important role in a firms capital structure.

2. Dividend policy can be affected by the firms investment decisions.
3. Dividend policy is the indicator for the company growth and stability.

1.4 Significant of study

Dividend policy is about the decision of the managers regarding
distribution of profit as dividends. This policy is probably the most
important single area of decision making for finance manager. Action
taken by the management in this area affects the growth rate of the firm,
its credit standing, share price and ultimately the overall value of the firm.
Progress of the firm may be hamstrung owing to insufficiency of
resources which may result in fall in earnings per share. Stock market is
very likely to react to this development and share prices may tend to sag
leading to decline in total value of the firm. Extreme care and prudence
on the part of the policy framers is necessary. In retention of earnings lies
capital gain while distribution of income increases dividend earnings.
1.5 limitation of study
Before presenting the results, several limiting exports of this research
should be noted:
i. It only focuses on four areas: Factors, influencing dividend policy
changes in these factors overtime, industry influences on dividend
policy and analysis of dividend policy.
ii. Firms may pay high dividends if they have high, free as flows together
with a low
iii. Primary data cannot be more useful than secondary date.

1.6 Review of literature

As mentioned earlier, dividend policy determines the allocation of
earnings between payments to shareholders and retained earnings. The
significance of dividend policy lies in the firms management ability to
maintain a balance between growth and dividends distribution to the
shareholders. Dividend policy is therefore, an important element in the value
of the firm. Firms may adopt residual or stable dividend policies.

1.6.1 Residual dividend policies

Companies which rely on internally generated equity to finance new
projects employ resident dividend policy (Aduda and Kimath, 2011). Residual
dividend policy is a method of distribution where dividends are paid after all
the requirements for capital are met.

1.6.2 Stable dividend policy

Dividend stability means consistency in the dividend payout each year.
It refers to regular payments of a certain amount of dividend year after year
even if the earnings of the company withered fluctuations (AP GWILYM act as,
2000). This is because shareholders generally value stable dividends better
than companies with fluctuating dividend policy.

Higgins (1972) attempted to develop and test a dividend mode for a

shareholders wealth maximizing firm consistent with the valuation theory. He
assumed that in an environment of tax differential and transaction costs,
shareholders prefer capital gain to dividend income. Dividend is viewed as a
residual in the corporate financing and investment decisions. He argues that
the relevant cost here relates to the possible accumulation of excess liquidity
resulting from whether or not to pay dividend and the need for external
financing.

Muk herjea and Austin (1980) studied the relationship between share price
and dividend policy in a sample of 198 Texas banks during the period
between 1973 and 1975. Seven variables were used to explain dividend
policy: price to book value, price to earnings ratio, dividend payout ratios and
dividend cash pay-out ratios, dividend to book value and dividend held. They
concluded that the share prices of the small banks are valued relatively
lower than larger banks.
They further noticed that bank size has insignificant effect on dividend policy.
The result implies that other factors than dividend pay-out may affect share
value.

Mahmoud st al (1995) indicated that dividend policy is used by a firms

management as a mechanism to reduce agency cost related to the
relationship between shareholders (principal) and management (agent). By
distributing cash, management is forced to look for outside financing and
subject itself to the capital market security. This would result in a reduction in
agency cost.

According to Ezro Solmon, the dividend policy of a firm is a residual decision

and dividend is a passive residual. Dividend policy is basically a financing
decision which is primarily conditioned by available investment opportunities
and investors and different between dividend and capital gains. Their
principal desire is to earn higher return on their capital. If a firm has in hand
array of investment opportunities promising higher returns (r) and the cost of
capital (k), stock holders will be inclined to more and more retention so that
ploughed back funds may finance profitable investment outlets to generate
higher earnings. However, if expected return on potentials projects is likely to
be less than what it would cost, they would be least interested in
reinvestment of income and instead, immediate distribution of income will be
insisted upon.

This presents an overview of dividend policy. It provides insight into the

different between the relevance and irrelevance theories of dividend, which
explored possible factors that might influence employment of specific
dividend policy. The growth rate of the enterprises earnings, patterns of past
dividends and availability of investment opportunities are the major
determinants of dividend policy. Dividend policy influences the value of
enterprises in Nepal.

1.7 Organization of the study

The study has been organized into five chapters. Brief information about
each chapters are as follows:

Chapter I: Introduction
It deals with introduction part of the study like background of the study,
statement of the problem, objectives of the study, limitations of the study
and organization of the study.

Chapter II: Review of literature.

It includes review of available relevant studies. It includes the conceptual
review of the related books, journals, articles and the published and
unpublished research reports as well as their report.

Chapter III: Research Methodology

It describes research methodology employed in their study i.e. in what size
and shape research is carried out. It includes research design, sources of
date, population and sample and method of analysis.

Chapter IV: Presentation and Analysis of Data

This chapter is the major part of the whole study is which all collected
relevant data and analyzed.

Chapter V: Summary, Conclusion and Recommendation

This chapter includes the overall summary of the proposal.

2 Research Methodology

The process used to collect information and data for the purpose of
making business decisions. The methodology may include publication
 research, interviews, surveys and other research techniques and could
include both present and historical information.

2.1 Research Design

The research design refers to the overall strategy that you choose to
integrate the different components of the study in a co he rant and logical
way. Different variable are used to measure the dividend policy that
corporate pays to the shareholders dividend policy, dividend yield, cash
payout ratio, dividend payout ratio, price earning (EPS) are the indicators
to measure dividend policy.

2.2 Population and Sample

Population of this study is one commercial bank of Nepal. Our study
focused on the liquidity policy of Everest Bank Limited will be taken as a
sample for the study under the convenience sampling method.

2.3 Sources of Data and Collection Procedures

This study is mainly based on the secondary data. The NEPSE report of
the concerned bank shows the important of data to this research work.
Related bank and stock exchange provides the related information.

2.4 Data Analysis and Techniques

The method of dividend payment creates volubility in the dividend
payments that some investors find undesirable Dividend payout ratio is
calculated to determine the optional capital budget. Debt/equity ratio is
calculated to determine the optional capital before making any dividend
distribution.
 Reference
(1)Kothari, C R (2004) Research methodology, method and techniques
new delli willey wastery limited.
(2)American Association of Accounting (2017)
(3)K. Sujata, Impact of Dividend Policy on shareholder value:
A study of Indian Firms 2010, Doctorial Thesis
(4)S. Bhattacharaya, Imperfect information Dividend policy, and the bird
in the hand fallacy. The bell journal of Economics, 10(1979) no.1, 259-
270. http://dx.doc.org/10.2307/3003330

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