TRIBHUWAN UNIVERSITY

MAHENDRA MULTIPLE CAMPUS

BHARATPUR – 15, GHORAHI

PROPOSAL WRITING ON:

DIVIDEND POLICY OF COMMERCIAL BANK OF NEPAL
WITH REFERENCE TO NIC ASIA AND NABIL BANK

SUPERVISED BY:

Submitted BY:
Samir Bhandari (27599/20)
Submitted To:
FACULTY OF MANAGEMENT
TRIBHUWAN UNIVERSITY
In the fulfillment of the requirement for the degree of
Bachelors of Business Administration (BBA)

Date of Submission:

Table of contents
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1. Introduction…………………………………………………………
……………. 3
2. Problem of
statement……………………………………………………….. 4
3. Objective of the
study……………………………………………………….. 5
4. Significance of
study………………………………………………………….. 6
5. Limitation of
study…………………………………………………………….. 7
6. Literature
survey……………………………………………………………….
. 8,9
7. Methodology………………………………………………………
…………….. 10
7.1 Research
design………………………………………………………... 10
7.2 Data collection
procedures……………………………………….. 10
7.3 Population and
sample……………………………………………… 11
7.4 Methods of data
analysis…………………………………………… 11
8. References…………………………………………………………
………………. 12

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1. Introduction

A company is established through capital invested by promoters and general

shareholders, who are the true owners of the company. Shareholders invest with
the expectation of receiving adequate returns, known as dividends, on their
investment.
Dividends represent a portion of the company’s net earnings distributed to
shareholders, either in cash, shares, or a combination thereof.
Two main types of shares exist: common stock (equity) and preferred stock.
Common stock, issued before and after incorporation, grants shareholders
ownership rights, including electing the board of directors. Preferred stock, a
hybrid security blending features of fixed income bonds and equity
securities, offers specific dividends paid before common stock dividends and
priority in company liquidation.

The dividend policy dictates how profits are divided between shareholder
distribution and retention for investment. This policy encompasses decisions
regarding cash dividends, stock dividends, and their respective amounts.
Factors such as percentage, timing, payment method, and dividend stability
are integral to the policy.

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 The relationship between dividends and the firm’s value serves as the
primary criterion for decision-making.
Types of Dividend
Cash Dividend
Stock Dividend
Special-Dividend
Bond Dividend
Scrip Dividend

2. Problem of Study

The dividend payout policy remains a contentious subject in corporate finance,

engaging scholars for over fifty years. However, dividends are not a recent
phenomenon; they have been customary in corporate practices for centuries.
Despite this historical norm, notably successful companies like Apple and Google
have opted not to issue dividends (Ciaccia, 2012), suggesting that dividend
payments are not obligatory for success. This raises the question: why do firms pay
dividends at all? Modigliani and Miller (1961) proposed a compelling argument,
positing that, in an ideal financial market devoid of taxes, transaction costs, and
other imperfections, a company’s value is unaffected by its dividend policy. They
assert that the firm’s value hinges solely on its earning potential and investment
strategy, rather than how profits are distributed to shareholders (Modigliani &
Miller, p.414). However, Brealey et al. (2008, p.973) contend that the dividend
payout debate remains unresolved, emphasizing the necessity for further research
to deepen understanding.

Understanding the factors affecting dividend payouts is crucial for

stakeholders.

While numerous studies will be explored factors influencing dividend

payouts globally, variations exist between countries. Limited research has
been conducted on this topic in Nepal, prompting an investigation into
potential factors influencing dividend payouts.

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3. Objective of study

The objectives of the study can be summarized in the following points:

i. To evaluate the dividend distribution pattern of Nepali commercial bank.

ii. To analyze the existing dividend policy and practices adopted by Nepali
commercial banks.
iii. To evaluate the relationship between financial performance of the bank
and its dividend payment to shareholders.
iv. To evaluate the impact of dividend payment on share price of a company.

By delving into these objectives, this study will seek to offer comprehensive
insights into the dividend behavior of Nepalese joint venture commercial
banks, thereby contributing to the existing literature on dividend policies and
practices within the banking sector in Nepal.

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4. Significance of study

i. Shareholders can use the research findings to compare dividend policies among
three joint venture commercial banks, aiding them in assessing investment
productivity and justifying investment decisions.
ii. Management can leverage the research to identify deficiencies in current
dividend policies and propose appropriate remedies.
iii. Policymakers will be benefited from comparative analysis of dividend policies,
deriving insights useful for formulating or revising dividend policy frameworks.
iv. Various stakeholders such as customers, financial agencies, stock brokers,
interested individuals, and scholars will find the research on dividend policies of
joint venture banks valuable.
v. The study will be expected to yield benefits for other banks.

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5. Limitation of study

The study will subject to several limitations, including:

i. The findings of the proposed study won’t be asserted as flawless due to

methodological limitations. It will relie solely on secondary data from commercial
banks.

ii. The study’s scope will be confined to ten years of data, spanning from 2013/14
to 2022/23 A.D.

iii. The study will include two commercial banks, potentially limiting the
generalizability of the findings.

iv. Additionally, limitations such as tool reliability, lack of research experience,

and data scarcity further will be constrained the study.

v. Another constraint will be the consideration of only few variables and a

relatively small sample size.

vi. Time constraints and financial constraints will be faced during the research
phase.

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6. Literature Review

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.

Theoretical review: A theoretical review will involve evaluating existing

theoretical frameworks, concepts, and models relevant to a particular research
topic or area of study.
The residual theory of dividend: The residual theory of dividend policy posits that
a company should only distribute dividends from its remaining earnings, which
means dividends are issued only if funds are available after meeting optimal capital
expenditure levels—essentially, after all appropriate investment opportunities have
funded.

Dividend irrelevancy theory, (Miller & Modigliani, 1961): The theory of dividend
irrelevance posits that a company’s dividend policy has no impact on either its
stock price or its cost of capital.

The bird in the hand theory, (John Lintner 1962 and Myron Gordon, 1963): The
crux of this theory lies in the concept that shareholders, being risk-averse, favor
current dividends over future dividends due to their perceived lower risk and so on.

According to the signaling hypothesis, shareholders may interpret an increase in

dividend payments as a positive indication of future profitability, resulting in a
favorable reaction reflected in rising share prices. Conversely, a reduction in

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dividend payouts may be perceived as an adverse signal regarding future earnings
prospects, leading to an unfavorable reaction in share prices

7. Methodology

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In pursuit of achieving the research’s overarching goals, a structured methodology
will be employed. This section delineates the data type and outlines the methods
and procedures for data analysis.
5.1 Research design:
The research will be structured with both descriptive and explanatory designs. The
explanatory design aims to examining past journals, annual reports, related
schedules, and consultations to gather qualitative and quantitative information
relevant to the research objectives. Meanwhile, the descriptive design will take a
distinct approach by utilizing the financial and statistical tools to explore the
factors influencing the dividend policy of Nepalese commercial banks. This will
include testing the theoretical relationship between dividend payout ratio and
variables such as Interest ratio, Earnings per share, and P/E ratio, alongside
analyzing the practices of these banks.

5.2 Data Collection Procedure:

This study will be based on secondary data. The basic data will be collected from
the annual reports of the selected banks. Other supplementary data and information
will be obtained from various sources such as Nepal Rastra Bank, Nepal stock
exchange limited, previous dissertation, research publication, and relevant
websites.

5.3 Population and Sample:

Out of 20 commercial banks of Nepal, which will be provided in the appendix
section, studying all the banks and their dividend policy and the impact of different
variables will be both time consuming and lengthy. Sampling method will be
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selected for the study and under this method Nabil Bank Limited (NABIL) and
NIC Asia Bank Limited (NICA) has been taken as sample.

5.4 Methods of Data Analysis:

To analyze data we will use various financial and various ratio of finance like EPS,
Interest Ratio (IR), Dividend Payout Ratio (DPR tools), Return on Assets (ROA),
Return of Equity (ROE). Furthermore the statistical tools such as Mean, Standard
Deviation (S.D), Coefficient of Variation (C.V) and Correlation analysis will be
used.

8. References

Al-Malkawi, H. A. N. (2008). “Dividend policy and stock price volatility:

Australian evidence.” Journal of Risk Finance, 9(5), 493-504.

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Baker, H. K. (2009). Dividends and Dividend Policy. John Wiley and Sons.
Brealey, R. A., Myers, S. C., & Allen, F. (2008). Principles of Corporate Finance.
9 ed. New York: McGraw-Hill Education.
Ciaccia, C. (2012). Can Apple Investors Sue For a Dividend, Yahoo Finance.
Retrieved from http://finance.yahoo.com/news/apple-investors-sue-dividend-
130319100.html.
Lintner, J. (1956). Distribution of incomes of corporations among dividend,
retained earnings, and taxes. American Economic Review, 46(2), 97-113.
Lintner, J. (1962). “Dividends, earnings, leverage, stock prices and the supply of
capital to corporations.” The Review of Economics and Statistics, 44(3), 243-269.
Modigliani, F., & Miller, M. (1961). “Dividend Policy: Growth and the Valuation
of Shares.” Journal of Business, 36.
Miller, M. H., & Rock, K. (1985). Dividend Policy under Asymmetric Information.
The Journal of Finance, 40(4), 1031-1051.

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