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ooff DDrr.. NN..SS.. MMaallaavvaallllii iinn ppaarrttiiaall ffuullffiillllmmeenntt,, ooff tthhee rreeqquuiirreemmeenntt ooff
MMBBAA ddeeggrreeee ooff BBaannggaalloorree UUnniivveerrssiittyy,, aanndd iiss mmyy oorriiggiinnaall wwoorrkk..
TThhiiss pprroojjeecctt ddooeess nnoott ffoorrmm aa ppaarrtt ooff aannyy rreeppoorrtt ssuubbmmiitttteedd ffoorr aannyy
ootthheerr ddeeggrreeee oorr ddiipplloommaa ooff BBaannggaalloorree UUnniivveerrssiittyy oorr aannyy ootthheerr
uunniivveerrssiittyy..
Place: Bangalore SREERAM P N Date:
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II hheerreebbyy ddeeccllaarree tthhaatt tthhee rreesseeaarrcchh wwoorrkk eemmbbooddiieedd iinn tthhiiss
ddiisssseerrttaattiioonn eennttiittlleedd ““ IImmppaacctt ooff DDiivviiddeenndd PPoolliicciieess oonn tthhee
VVaalluuee ooff tthhee FFiirrmm”” hhaass bbeeeenn uunnddeerrttaakkeenn aanndd ccoommpplleetteedd bbyy
MMrr..SSrreeeerraamm PP..NN..,, uunnddeerr mmyy gguuiiddaannccee aanndd ssuuppeerrvviissiioonn..
II aallssoo cceerrttiiffyy tthhaatt hhee hhaass ffuullffiilllleedd aallll tthhee rreeqquuiirreemmeennttss
uunnddeerr tthhee ccoovveennaanntt ggoovveerrnniinngg tthhee ssuubbmmiissssiioonn ooff ddiisssseerrttaattiioonn
ttoo tthhee BBaannggaalloorree UUnniivveerrssiittyy ffoorr tthhee aawwaarrdd ooff MMBBAA DDeeggrreeee..
Place: Bangalore Dr.N.S.MALAVALLI
Date : Internal guide
MPBIM, Bangalore
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TThhiiss iiss ttoo cceerrttiiffyy tthhaatt MMrr..SSrreeeerraamm PP..NN..,, bbeeaarriinngg
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PPoolliicciieess oonn tthhee VVaalluuee ooff tthhee FFiirrmm”” uunnddeerr mmyy gguuiiddaannccee..
TThhiiss hhaass nnoott ffoorrmmeedd aa bbaassiiss ffoorr tthhee aawwaarrdd ooff aannyy
ddeeggrreeee//ddiipplloommaa ffoorr aannyy ootthheerr uunniivveerrssiittyy..
Place: Bangalore Dr. N.S. MALAVALLI
Date: PRINCIPAL
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I thank Dr.N.S.Malavalli, principal and internal guide,
M.P.Birla institute of management, Associate Bharathiya Vidya
Bhavan for the constant guidance, encouragement and
motivation extended throughout the study.
I am thankful to Dr. T V N Rao, Adjunct Professor, M P
Birla Institute of management for his sincere effort and
guidance, which was helpful in the completion of the study.
I also thank my parents and friends for their co-operation,
support and encouragement extended throughout the study.
SSrreeeerraamm PP..NN
CONTENTS
PARTICULARS PAGE NO.
CHAPTER-
I
INTRODUCTION 1
Background & Need For The Study 2
Statement of the Problem 4
Objectives of the study 4
Hypothesis 4 Theoretical Background 5
Operational Definitions 9 Scope Of The Study 10 Delimitations 10
CHAPTER-
II
REVIEW OF LITERATURE 11
CHAPTER-
III
METHODOLOGY 17
Research Design 17
Study Setting 17
Population 17 Sampling 17 Data Collection 19
Statistical Analysis and Model Used 20
CHAPTER-
IV
ANLYSIS AND
INTERPRETATIONS
21
SECTION-I Cross Sectional Regression Analysis 21
SECTION-II Time Series Regression Analysis 27
CHAPTER-V DISCUSSION 41
Findings of the study 42
Summary and Conclusion 45
Limitations 46
Recommendations 46
BIBLIOGRAPHY
LIST OF TABLES
TABLE
NO.
PARTICULARS PAGE
NO.
IV-1 Cross Sectional Values for the year 1999/00
21
IV-2
Cross Sectional Values for the year 2000/01
22
IV-3 Cross Sectional Values for the year 2001/02
23
IV-4 Cross Sectional Values for the year 2002/03
24
IV-5 Cross Sectional Values for the year 2003/04
25
IV-6 Cross Sectional Regression Results 26
IV-7-37 Time Series Table of the companies 27 to 37
IV-38 Time Series Regression Results 38
ABSTRACT
To pay or not to pay dividend is a critical decision any management takes.
Maximizing the value of the firm or maximizing the shareholder’s wealth is the ultimate
objective of any firm. So any decision of the management has to be valued on the basis of
its effect on the value of the firm.
Aim of the study was to understand the Impact of dividend policies on the value
of the firm. Along with dividend other variables such as retained earnings, debt-equity
and the return on equity share prices of the Indian public limited companies are studied to
understand the relationship between the dividend and the share prices. The objectives of
the study were to describe the samples in terms of it’s pattern of dividend distribution and
debt and to find out the relationship between the dividend and debt & the return on the
equity shares. The findings of the study can be used to understand the influence of
dividend decisions and capital structure decisions on the value of the firm.
A descriptive research, which is quantitative in nature, was conducted.
Convenient sample of 31 companies, shares of which are traded in Bombay Stock
Exchange and National Stock Exchange was studied. The historical data were collected
from the Bangalore stock Exchange and the web site of the Bombay Stock Exchange and
National Stock Exchange. The relationship between the Value of the firm & Dividend
Policies of the firm and the capital structure of the firm is studied using Multiple
Regression model.
Results of the study show that there is no evidence of significant association
between dividend policies on the value of the firm (Significant at 5% level using “t” test).
The findings include both cross-sectional interpretation for the entire sample companies
for five years (1999/2000 to 2003/2004) and time series interpretation for each of the
sample companies separately for ten years (1994/1995 to 2003/2004). The findings also
include the dividend distribution and debt patterns of the samples under study.
CHAPTER-I
INTRODUCTION
The Dividend decision of the firm is a crucial area of financial management. The
important aspect of dividend policy is to determine the amount of earnings to be retained
and the amount to be distributed to share holders. Retained earnings are the most
significant internal source of financing. On the other hand, dividends may be considered
desirable from shareholder’s point of view as they tend to increase their current return.
During the first part of the twentieth century, dividends were the primary reason investors
purchased stock. It was literally said, “The purpose of a company is to pay dividends”.
Today, the investor’s view is a bit more refined; it could be stated, instead, as, “the
purpose of a company is to increase my wealth.” Indeed, today’s investor looks to
dividends and capital gains as a source of increase.
The objective of any dividend policy should be to increase the share holder’s
return so that the value of his investment is maximized. Share holder’s return has two
components; dividends and capital gains. There are many reasons for paying dividends
and there are many reasons for not paying any dividends. As a result, `dividend policy' is
controversial. A higher payout of dividend means lower retained earnings which may
affect the growth of the firm and perhaps a lower market price per share. The decision
becomes more critical when there exists an investment opportunity to the firm. If the
profits earned is distributed to investors then the retained earnings to that extent will be
reduced which will result in increasing debt to finance the investment opportunity. On the
other hand the investor’s requirement also must be satisfied by provi ding the optimum
dividend. All these factors which go through the minds of the share holders will be
reflected in the market price of the shares. . Thus the dividend decision is very vital to any
organization.
BACKGROUND AND NEED FOR THE STUDY
How share prices differ from each other? To what extent financial decisions of the
management have a bearing on the share holder’s wealth? These are some of the several
questions arose in the minds of the investors and other stakeholders of the firm. No
matter what type of industry, growth perspective, capital structure etc… of a firm the
ultimate objective is maximizing share holders’ wealth. Share holders’ wealth or the total
value of the firm being the final goal, all the decisions of the management is directed
towards it. The next question arises is how to value these decisions. It is always believed
that the market value of shares reflects the emotions and reactions of the investors to each
and every decision the management takes.
The major decision of financial management is the dividend decision, in the sense
that the firm has to choose between distributing the profits to the share holders and
plaguing back the profits in to the business. The choice would obviously hinge on the
effect of the decision on the maximization of share holders wealth. Given this objective
firms should be guided by the consideration as to which alternative use is consistent with
the goal of wealth maximization. A firm will be well advised to distribute the net profits
as dividend if such a distribution results in maximizing the share holders wealth; if not it
would be better to plough back the profits into the business for future investment and
growth. There are however conflicting view regarding impact of dividend on the
valuation of the firm. On the relationship between the dividend policy and value of the
firm different theories have been advanced. One school of thought treats it as relevant
and the other as irrelevant. There are two extreme views, that is; a) dividend are good as
it increases the shareholder value; b) dividends are bad as it decreases the shareholders
value. The crux of the arguments is whether to distribute the earnings or retain the
earnings.
Another important financial decision is capital structure decision. Under normal
conditions the earnings per share increases when the leverage is more. More debt or
leverage also increases the risk of the firm. Thus it cannot be clearly said whether the
value of the firm increases with leverage. As the objective of the firm is to increase the
value of the firm, the capital structure, or leverage, decision should be examined from the
point of view of its impact on the value of the firm. If the capital structure affects the
value of the firm, then every firm will try to achieve the optimal capital structure which
maximizes the value of the firm. There exist conflicting theories on the relationship
between the capital structure and the value of the firm.
Thus there exists a research gap and the purpose of the current study is therefore
to describe whether the dividend decisions really influence the value of the firm or not. In
this study an attempt has also been made to understand the relationship between the
capital structure and the value of the firm.
STATEMENT OF THE PROBLEM
There exist conflicting views with regard to the impact of dividend decisions on
the value of the firm. Some are of the opinion that dividends do affect the market price of
the shares while others argue it does not. Thus there exists a knowledge gap. The research
problem under consideration is as follows.
“To what extent does the dividend decision affect the value of the widely held public
limited companies in India?’’
OBJECTIVES OF THE STUDY
1 To describe the samples selected in terms of the financial ratios.
2 To explain the dividend distribution / retention and the debt equity patterns of the
samples.
3 To understand the relationship between the dividend policies of the company and
the value of the firm.
4 To study the effect of capital structure decision on the value of the firm.
HYPOTHESIS
H0: Dividend Policies do not affect the value of the firm.
H1: Dividend Policies do affect the value of the firm.
THEORETICAL BACKGROUND
Dividend
Companies that earn a profit can do one of the three things; pay that profit out to
shareholders, reinvest it in the business through expansion, or both. When a portion of the
profit is paid out to shareholders, the payment is known as a dividend. The dividend is a
variable income, the amount of which depends on the amount of annual profit made by
the company. The dividend corresponds to the share of income that the Annual General
Meeting opts to distribute to shareholders. The remainder is placed in reserve and used to
increase equity in order to finance the company’s development.
By definition dividend is the payment made by a firm to its owners, either in cash or
in stock. It is also referred to as the income component of the return on an investment in
stock. Dividend is a taxable payment declared by a company's board of directors and
given to its shareholders out of the company's current or retained earnings. Dividends are
usually given as cash (cash dividend), but they can also take the form of stock (stock
dividend) or other property. Dividends provide an incentive to own stock in stable
companies even if they are not experiencing much growth. Companies are not required to
pay dividends. The companies that offer dividends are most often companies that have
progressed beyond the growth phase, and no longer benefit sufficiently by reinvesting
their profits, so they usually choose to pay them out to their shareholders.
The term "dividend" usually refers to a cash distribution of earnings. If it comes from
other sources, it is called "liquidating dividend". It mainly has the following types:
• Regular: Regular dividends are those the company expects to maintain, paid
quarterly (sometimes monthly, semiannually or annually).
• Extra: Those that may not be repeated.
• Special: Those that is unlikely to be repeated.
• Stock Dividend: Paid in shares of stocks. Similar to stock splits, both increase
the number of shares outstanding and reduce the stock price.
The various terms with regard to Dividends are as follows.
• Cum Dividend: Phrase used to indicate that a stock is selling with a recently
declared right or dividend.
• Ex Dividend: A security that no longer carries the right to the most recently
declared dividend; or the period of time between the announcement of the
dividend and the payment.
• Indicative Dividend: The total amount of dividends that would be paid on a share
of stock over the next 12 months if each dividend were the same amount as the
most recent dividend.
• Interim Dividend: A dividend, which is declared and distributed before the
company's annual earnings have been calculated; often-distributed quarterly.
• Omitted Dividend: A dividend which was expected, but which was not declared,
usually due to financial difficulties. Also called passed dividend.
• Optional Dividend: Dividend which the shareholder can choose to take as either
cash or stock.
• Participative Dividend: Dividend paid on participating preferred stock. This is an
unusual dividend structure, since it allows holders of preferred stock to receive
payouts in addition to the stated dividend rate under certain circumstances.
• Patronage Dividend: A taxable distribution made by a cooperative to its members
or patrons.
• Trading Dividend: The practice by some corporations of buying and selling other
corporations' stock to maximize collected dividends, for tax benefits (since
corporations pay very little tax on dividend income). It is also called dividend
capture.
• Special Dividend: A nonrecurring dividend that is exceptional in terms of either
size or date issued.
Capital Structure (Debt-Equity)
Another important variable, which affect the value of the firm, is the capital structure
of the firm. Finance theory tells us that, in the absence of bankruptcy costs, corporate
income taxation, or other market imperfections, the value of a firm is independent of its
financial structure. The theory is intuitive, because real assets determine a firm’s value; it
cannot be changed by purely financial transactions. In other words, financial assets on the
right side of the balance sheet have value only because of the real assets, including
intangibles and growth opportunities, on the left side. Therefore, if markets are doing
their job, it should not be possible to create value by shuffling the paper claims on the
firm's real assets. However, if there are imperfections such as taxes, underdeveloped
financial markets, and inefficient legal systems financial structure becomes relevant.
Firms must decide whether to issue debt or equity securities to minimize the costs
entailed by these imperfections.
How Shareholders' Wealth Grows
Shareholders benefit financially from their investment in successful companies in
three main ways:
• Dividends, which are a distribution of part of a company's net profit to
shareholders, as part owners of the company. Most large industrial companies pay
dividends twice yearly, and often these dividends have tax advantages as well.
• Capital growth, which is the increase in the market value of a company's shares
over the total cost of those shares. It usually reflects the growth in the company's
profits and assets, but it can also be affected by a change in the sentiment of the
whole share market as it goes through its cycles. Prices of shares are determined
by many factors which are interrelated to each other.
• New Issues of shares, which may be made by a company when it requires further
funds. Such new shares are usually offered at a discount to existing shareholders,
based on a predetermined ratio, without having to pay brokerage. The
entitlements to the new shares offered are known as Rights, as shareholders have
the right to acquire the shares or to sell the rights to these new shares on the stock
market. A company may also make a Bonus Issue to shareholders at no cost.
OPERATIONAL DEFINITIONS 1. DIVIDEND PAYOUT
A ratio showing the percentage of net profits paid out in dividends on common
stock, after reducing net profits by the amount of dividends paid on preferred stock. It
calculated as the percentage of dividend paid on profit after tax. In this study dividend
payout ratio is expressed as the ratio of dividend paid to the net profit after tax.
D/P Ratio = Dividend Paid / Net profit after tax
2. RETENTION RATIOS
Retention ratio shows the rate of earnings retained by the company for financing
the investments needs. Retained earnings are the main internal source of finance for the
company. This explains to what extent the earnings of the firm are ploughed back to the
business. Technically it is one minus the dividend paid out ratio.
Retention Ratio = 1 – D/P Ratio.
3. DEBT EQUITY RATIOS
Debt Equity ratio shows capital structure of the firm. This represents the capital
structure of the company. It is defined as the ratio of debt to equity of the firm.
D/E Ratio = Debt / Equity
4. RETURNS ON SHARES
Return on shares is calculated by dividing the previous year’s price from the
current year price and the log natural of the resultant figure is calculated as it gives a
continuously compounded rate of return
Ln (P1 / P0)
5. VALUE OF THE FIRM
The effect on the value of the firm is analysed by studying the return on equity
shares.
Return on Equity share = P1 / P0, where P1 is the market price of equity
share for current year and P0 is the market price of the equity share for the previous year.
SCOPE OF THE STUDY
Here an attempt is made to understand increase or decrease in the share price due
to the different dividend payout ratios. Here the ratios such as dividend payout, retention
ratio, debt equity ratios and return on the shares are studied. The findings of the study can
be used to understand the influence of dividend decisions and capital structure on the
value of the firm.
DELIMITATIONS
• It is needless to say that the factors, which affect the share prices, are an endless
list. Factors other than dividend payout, retention and debt equity ratios are not
studied.
• The study has taken only ten years data of 31 companies to explain the
phenomenon.
CHAPTER II
REVIEW OF LITERATURE
RELEVANCY OF DIVIDEND This approach purports that the value of the firm is affected by the dividend
policy and the optimal dividend policy is the one, which maximizes the firm’s value.
These variables consider dividend decisions to be an active variable in determining the
value of a firm. Two famous models in support of this are explained below.
Walter Model (James & Walter, 1963) Walter model supports that the dividend policy of the firm is relevant. The
investment policy of the management cannot be separated from its dividend policy and
both are interrelated. Thus the choice of dividend policy does affect the value of the firm.
Walter model is built around certain assumptions such as constant return, constant cost of
capital, constant earnings and dividend. He also made an assumption that financing of
new investment is done through retained earnings and debt and no new equity shares are
being issued.
Walter in his argument explains three situations
• If the return on investment exceeds the cost of capital then the firm has to retain
the earnings and should not be distributed as dividends.
• If the cost of capital exceeds the return on investment then the firm has to pay the
entire earnings as dividend
• If the return on investment and the cost of capital is same then rate of dividend
payout can be 0 to 100.
According to this model if the firm retains the earnings it gives a signal that the
investment opportunities are more and it increases the share prices. Similarly when the
firm distributes the entire earnings as dividend, share prices will automatically increase,
as the income on the shares are more. The Walter model is criticized on the unrealistic
assumptions on which it is made such as no debt financing, constant return, cost of capital
and earnings etc… are not practically possible.
Gordon Model (Gordon Myron J, 1962)
Myron Gordon (1962) came up with a dividend relevance model which is
popularly known as the “bird in the hand argument”. The crux of the argument is that the
• Investors are risk averse and
• They put a premium on the “certain” returns and discount or penalize the
“uncertain” returns
Gordon says that the current dividends are certain and the reinvestment of current
dividend for future returns is uncertain. Thus the investors would be inclined to pay
higher prices for shares on which current dividends are paid and discounts the value of
the shares on which dividends are postponed.
This model is based on the belief that a bird in the hand worth two in the bush.
Thus incorporating the uncertainty into the model, Gordon concludes that the dividend
policy affects the value of the firm. His model justifies the behavior of investors who
value a rupee of dividend income more than a rupee of capital gains income, because
dividends are less uncertain when compared to capital gains. However this model is also
not free of criticism because of the assumptions on which it is based.
IRRELEVANCE OF DIVIDEND Dividend irrelevance approach implies that the value of the firm is unaffected by
the distribution of dividends and is determined by the earning power and risk of its assets.
It is based on the assumption that the investors are indifferent between dividends and
capital gains. So long as the firm is able to earn more than the equity capitalization rate,
the investors would be content with the firm retaining the earnings.
MM Hypothesis (Modigliani and Miller, 1961) Modigliani and Miller argued that the dividend decisions have no effect on the
share prices of the firm and therefore no consequence. According to them it is the
investments policy through which a firm can increase its earnings and there by the value.
Under the conditions of perfect capital market, rational investors, absence of tax
discrimination between the dividend income and capital appreciation, given the firm’s
investment policy, its dividend policy may have no influence on the market price of the
shares.
The crux of the argument is the arbitrage process. When the earnings are paid out
as dividend, the funds required for additional investment has to be raised from either sale
of new shares or additional loans, thus the two acts offset or balance each other. Rational
investors prefer more wealth to less wealth and they know that the present value of
prospective dividends is the terminal value of the shares. MM argue that when dividends
are paid out, the market prices of the shares will decrease. What is gained by the investors
as a result of dividends will be neutralized completely by the decrease in the terminal
value of the shares. The market price before and after the payment of dividend is same
and the investors are indifferent between dividend and the retained earnings. As the
investors are indifferent, the wealth would not be affected by the current and future
dividend policies. It would entirely depend up on the expected future earnings. Thus MM
says that the difference in current and the future dividend policies can not affect the
market price of the shares as the present value of the prospective dividends is nothing but
the terminal value of the shares.
The assumption under which the MM hypothesis lies is highly unrealistic and
untenable in practice. As a result the conclusion that the dividend payment and the other
methods of finance will exactly offset and hence the dividend is irrelevant is not a
practical proposition. The validity of MM hypothesis is criticized on imperfections of
market also.
OTHERS Gragg & Malkeil in their paper on “Expectations and Structure of Share Prices”
present the results of an empirical study of year-end common stock prices from 1961 to
1965. The ratios of market prices earnings are related to such factors as earnings growth,
dividend pay out, and various proxy variables designed to measure the quality of the
return. They demonstrate in the study that it is possible to explain, for several successive
years the percentage of variability in market price earnings ratios with the variables
included in the study.
David & Julio (2004) University of Illinois and Urbana Champaign in their paper
on “Reappearing Dividends” studied the reappearing phenomenon on United States of
America. They observed that the cash dividend paid by the US companies during 1984 to
1999 has fallen down from 32% to 16.%. But after reaching a low percentage of 15% in
2001 now the dividend payout ratios have increased to 20% in first quarter of 2004. In
their study they found out that the downward trend in dividends experienced a sharp
reversal with the new millennium. They have also identified certain reasons such as tax
cut in dividends, investment opportunities, corporate governance etc… responsible for
the reappearing of dividend.
RETAINED EARNINGS
S M Gupta (1989) studied the behavior of retained earnings in private sector and
public limited companies in India, for a period from 1975-76 to 1984-85. The results
showed that the retention ratio (retained earnings / Net profit after tax) moved from 62.22
to 31.87 percentage with an average of 53.27. The overall study concluded that the
corporations’ tries to stabilize the dividends over a period and any increase in profits go
to the retained earning for reinvestment in the business. It is also observed that the
constant profit earning industries maintained a retention ratio; but low profit earning
industries or loss incurring industries neither maintained any retention ratio nor
maintained dividend payout ratios.
CAPITAL STRUCTURE vs. FIRM’S VALUE
The two principal sources of finance for a company are equity and debt. What
should be the proportion of equity and debt in the capital structure of the firm? One of the
key issues in the capital structure decision is the relationship between the capital structure
and the value of the firm. There are several views on how this decision affects the value
of the firm.
Optimal Capital Structure Theory: Optimal capital structure theory of
Modigliani-Miller (1958) suggest there exist an optimal leverage at which the firm
obtains a maximum value by minimizing its weighted average costs of capital, given the
market imperfections and tax deductibility of interest costs from pre-tax income of firms.
The proposition asserts that the value of a firm with tax-deductible interest is equal to the
value of an all-equity firm as enhanced by the tax savings. According to this approach,
the capital structure decision of a firm is irrelevant. This approach supports the NOI
approach and provides a behavioral justification for it. This approach indicates that the
capital structure is irrelevant because of the arbitrage process which will correct any
imbalance i.e. expectations will change and a stage will be reached where further
arbitrage is not possible.
Durand D (1959) identified two views; Net income approach and Net operating
approach. Under the Net income approach the cost of debt and the cost equity are
assumed to be independent to the to the capital structure. This approach says that the
weighted average cost of capital of the firm declines and the total value of the firm rise
with increased use of leverage. Under the Net operating income approach, the cost of the
equity is assumed to increase linearly with leverage. As a result, the weighted average
cost of capital remains constant and the total value of the firm also remains constant as
the leverage is changed.
Davidson N W, et.al., (1994) in their report on “The effect of firm and industry
debt ratios on market value” analyzed 183 firms and studied the effect of debt ratios to
the market value of the firm. Overall conclusion of the study is that the relationship of the
firm’s debt level and that of its industry does not appear to be of concern to the market.
Arsiraphoongphisit O & Ariff M (2003) in their report on “Optimal capital
structure and firm value- an Australian evidence, 1991-2003” (Corporate Finance)
analyzed 654 observations for a period of 1991 to 2003 in Australian market on the effect
of capital structure change and firm’s value. The findings indicate that the market reacts
positively to announcements of financing that lead to capital structure moving closer to
their relative industrial Debt-Equity ratio. Thus market perceives and reacts positively to
the optimal debt-equity ratio. Thus debt-equity ratio has an impact on market value of the
firm.
From an overall review of the literature it is clear that there exist certainly a
contradicting view on the impact of the dividend policy of a firm on the value of the firm.
The studies on the effect of debt equity combination on share prices show that the
relationship is almost zero. But theoretically as the debt increases because of the tax
shield available the earnings must also increase and increase in earnings always increases
the market price of the shares. Thus we can see that there exists a knowledge gap in the
subject.
CHAPTER III
METHODOLOGY The methodology is the major phase of research in which the investigator makes a
number of decisions about the methods and materials to be used to study the research
problem, basically through collection of data. The methodological decision generally has
control implications for the validity of the study findings
TYPE OF RESEARCH Type of research is Descriptive research, which is Quantitative in nature.
STUDY SETTING
• Indian Public Limited Companies
• The Equity Shares of compnies are traded in Indian Stock Exchanges. (BSE &
NSE)
POPULATION A population is a group whose members possess specific characteristics that a
researcher is interested in studying. In this study the population includes all widely held
public companies whose shares are publically traded through a stock exchange.
SAMPLING FRAMEWORK This study includes analysis of public limited companies, which are listed in
Bombay stock exchange and National Stock Exchange of India.
SAMPLING TECHNIQUE
A sample is a portion of the population that has been selected to represent the
population of interest. Here in this study 31 companies are selected which are listed in
Bombay stock exchange and National stock Exchange, India. Sampling technique used
here is convenient sampling.
SAMPLE
The sample size is 31. The companies studied are the followings.
• Associated Cement Company Ltd.
• Bajaj Auto Ltd.
• Bharat Heavy Electricals Ltd.
• Cipla Ltd.
• Dr.Reddy’s Laborotaries Ltd.
• Grasim Industries Ltd.
• Gujarat Ambuja Cements Ltd.
• Housing Development Finance Corporation Ltd.
• Hero Honda Ltd.
• Hindalco Ltd.
• Hindustan Lever Ltd.
• Hindustan Petrolium Corporation Ltd.
• Infosys Technologies Ltd.
• Indian Tobacco Company Ltd.
• Larsen & Toubro Ltd.
• Ranbaxy Laboratories Ltd.
• Reliance Energy Ltd.
• Reliance Industries Ltd.
• Satyam Computers Ltd.
• Tata Motors Ltd
• Tata Power Ltd.
• Tata Iron and steel Company Ltd.
• Wipro Ltd.
• Zee Telefilms Ltd.
• ABB Ltd.
• Bharat Petrolium Corporation Ltd.
• Britannia Industries Ltd.
• Colgate Palmolive Ltd.
• Mahindra & Mahindra Ltd.
• Steel Authority of India Ltd.
• Mahanagar Telecom Nigam Ltd.
The shares of the above companies are commonly traded in the stock exchange
for the period under study ie; 1994/95-2003/04.
DATA COLLECTION
Secondary Data • Income statements of companies under study
• Balance sheets
• Historical stock prices
Data obtained • Figures and facts
• Unclassified raw data
Method of Data collection and steps
The data required for the study has been collected from the Data Base maintained
in the Bangalore Stock Exchange, Bangalore and from the Data Base of the Bombay
Stock Exchange and National Stock exchange through their web sites. The raw data
collected were converted in to the ratios and classified according to the requirement of
the study.
STATISTICAL ANALYSIS
¾�Descriptive Statistics is used to describe the pattern of dividend payout, Debt
equity and the return on shares.
Five Year Moving Average is used to estimate the expected Dividend
Payout, Retention Ratio and Debt-Equity Ratio of the successive years. This
approach is used to estimate the values incorporating its behavior for the past five
years.
Expected Value for the Year 6 = (Y5+Y4+Y3+Y2+Y1) / 5
¾�Statistical model used: The model used here is multiple - regression model.
The regression equation for the study is as under.
Y = a + b1 X1 + b2 X2
Y = Actual Return on Equity (For the year)
X1 = Expected Debt-Equity Ratio (Moving average for five years)
X2 = Expected Dividend Payout (Moving average for five years)
¾�For Cross sectional Regression analysis the above variables X1 and X2 for ten
years are converted in to five year moving averages.
¾�For time series analysis the actual data for the years are taken.
¾�As there exist high correlation between the dividend payout and retention ratio
there will be Multi Co-linearity effect on the regression analysis. To avoid this
retention ratio is not included in the regression model.
¾�“t” test significannce at 5% level is used to accept or reject the hypothesis
CHAPTER IV- ANALYSIS AND INTERPRETATION
SECTION-I CROSS SECTIONAL REGRESSION ANALYSIS Table no.IV-1 Cross sectional values for the year 1999/2000
Moving Average for 1994/95 to 1998/99 Company Return 1999/2000 Debt-Equity Dividend Payout Retention
Associated Cement Company Ltd. 0.10 1.16 0.65 0.35 Bajaj Auto Ltd. -0.18 0.16 0.20 0.80 Bharat Heavy Electricals Ltd. -0.52 0.54 0.15 0.85 Cipla Ltd. 0.77 0.49 0.10 0.90
Dr.Reddy’s Laborotaries Ltd. 0.65 0.15 0.21 0.79
Grasim Industries Ltd. -0.05 1.02 0.22 0.78
Gujarat Ambuja Cements Ltd. 0.18 1.07 0.34 0.66
HDFC Ltd. 0.10 4.51 0.28 0.72 Hero Honda Ltd. 0.31 0.57 0.20 0.80 Hindalco Ltd. 0.06 0.27 0.09 0.91
Hindustan Lever Ltd. 0.19 0.11 0.75 0.25 Hindustan Petroleum Corporation Ltd. -0.51 0.33 0.17 0.83 Infosys Technologies Ltd. 1.73 0.03 0.14 0.86
Indian Tobacco Company Ltd. -0.02 0.76 0.31 0.69 Larsen & Toubro Ltd. 0.08 0.57 0.37 0.63
Ranbaxy Laboratories Ltd. 0.27 0.55 0.29 0.71
Reliance Energy Ltd. 0.07 0.84 0.20 0.80
Reliance Industries Ltd. 0.35 0.72 0.23 0.77
Satyam Computers Ltd. 1.91 0.68 0.26 0.74 Tata Motors Ltd -0.42 0.82 0.44 0.56 Tata Power Ltd. -0.35 0.73 0.27 0.73
Tata Iron and steel Company Ltd. -0.17 1.15 0.43 0.57
Wipro Ltd. 1.87 1.19 0.06 0.94 Zee Telefilms Ltd. 2.10 0.17 0.27 0.73 ABB Ltd. -0.45 0.12 0.39 0.61
Bharat Petrolium Corporation Ltd. -0.24 0.46 0.18 0.82 Britannia Industries Ltd. 0.07 0.70 0.39 0.61
Colgate Palmolive Ltd. -0.37 0.01 0.81 0.19 Mahindra & Mahindra Ltd. 0.04 0.76 0.27 0.73 Steel Authority of India Ltd. -0.16 2.10 0.20 0.80 Mahanagar Telecom Nigam Ltd. -0.08 2.20 0.15 0.85
Table no.IV-2 Cross sectional values for the year 2000/2001 Moving Average for 1995/96 to 1999/00
Company Return 2000/01 Debt-Equity Dividend Payout Retention
Associated Cement Company Ltd. 0.08 1.15 0.59 0.21
Bajaj Auto Ltd. -0.46 0.14 0.21 0.79
Bharat Heavy Electricals Ltd. -0.28 0.35 0.13 0.87
Cipla Ltd. 0.31 0.23 0.12 0.88
Dr.Reddy’s Laborotaries Ltd. 0.13 0.20 0.20 0.80
Grasim Industries Ltd. 0.22 0.95 0.26 0.74
Gujarat Ambuja Cements Ltd. -0.02 0.89 0.33 0.67
HDFC Ltd. 0.45 4.47 0.36 0.64
Hero Honda Ltd. -0.05 0.47 0.19 0.81
Hindalco Ltd. 0.21 0.22 0.11 0.89
Hindustan Lever Ltd. 0.03 0.08 0.68 0.32
HDFC Ltd. 0.14 0.32 0.21 0.79
Infosys Technologies Ltd. 0.17 0.02 0.12 0.88
Indian Tobacco Company Ltd. -0.05 0.64 0.26 0.74
Larsen & Toubro Ltd. 0.01 0.70 0.40 0.60
Ranbaxy Laboratories Ltd. -0.04 0.43 0.35 0.65
Reliance Energy Ltd. 0.05 0.65 0.22 0.78
Reliance Industries Ltd. 0.47 0.84 0.23 0.77
Satyam Computers Ltd. 0.03 0.85 0.22 0.78
Tata Motors Ltd -0.40 0.76 0.59 0.41
Tata Power Ltd. 0.20 0.67 0.27 0.73
Tata Iron and steel Company Ltd. 0.11 1.11 0.43 0.57
Wipro Ltd. 0.02 0.98 0.07 0.93
Zee Telefilms Ltd. -0.06 0.18 0.27 0.73
ABB Ltd. -0.39 0.10 0.44 0.56
Bharat Petrolium Corporation Ltd. 0.05 0.52 0.21 0.79
Britannia Industries Ltd. -0.49 0.73 0.37 0.63
Colgate Palmolive Ltd. -0.03 0.02 0.81 0.19
Mahindra & Mahindra Ltd. -0.28 0.77 0.26 0.74
Steel Authority of India Ltd. 0.02 2.31 0.15 0.85
Mahanagar Telecom Nigam Ltd. -0.08 1.64 0.17 0.83
Table no.IV-3 Cross sectional values for the year 2001/02 Moving Average for 1996/97 to 2000/01
Company Return 2001/02 Debt-Equity Dividend Payout Retention
Associated Cement Company Ltd. -0.04 1.25 0.70 0.10
Bajaj Auto Ltd. 0.12 0.14 0.25 0.75
Bharat Heavy Electricals Ltd. 0.08 0.23 0.15 0.85
Cipla Ltd. -0.10 0.09 0.14 0.86
Dr.Reddy’s Laborotaries Ltd. 0.16 0.30 0.19 0.81
Grasim Industries Ltd. -0.08 0.89 0.27 0.73
Gujarat Ambuja Cements Ltd. -0.06 0.87 0.37 0.63
HDFC Ltd. 0.27 4.94 0.39 0.61
Hero Honda Ltd. 0.36 0.37 0.20 0.80
Hindalco Ltd. 0.02 0.22 0.11 0.89
Hindustan Lever Ltd. -0.08 0.11 0.68 0.32
Hindustan Petroleum Corporation Ltd. 0.38 0.37 0.26 0.74
Infosys Technologies Ltd. -0.45 0.00 0.11 0.89
Indian Tobacco Company Ltd. -0.06 0.52 0.27 0.73
Larsen & Toubro Ltd. -0.27 0.84 0.44 0.56
Ranbaxy Laboratories Ltd. 0.11 0.34 0.42 0.58
Reliance Energy Ltd. 0.00 0.54 0.22 0.78
Reliance Industries Ltd. -0.04 0.93 0.22 0.78
Satyam Computers Ltd. -0.72 0.83 0.17 0.83
Tata Motors Ltd -0.08 0.81 0.54 0.46
Tata Power Ltd. 0.25 0.66 0.29 0.71
Tata Iron and steel Company Ltd. -0.12 1.08 0.45 0.55
Wipro Ltd. -0.77 0.72 0.06 0.94
Zee Telefilms Ltd. -1.28 0.17 0.24 0.76
ABB Ltd. 0.12 0.08 0.48 0.52
Bharat Petrolium Corporation Ltd. 0.07 0.64 0.24 0.76
Britannia Industries Ltd. -0.06 0.72 0.32 0.68
Colgate Palmolive Ltd. -0.06 0.02 1.02 -0.02
Mahindra & Mahindra Ltd. -0.57 0.78 0.32 0.68
Steel Authority of India Ltd. -0.30 2.54 0.11 0.89
Mahanagar Telecom Nigam Ltd. -0.29 1.15 0.18 0.82
Table no.IV-4 Cross sectional values for the year 2002/03
Moving Average for 1997/98 to 2001/02 Company Return 2002/03 Debt-Equity Dividend Payout Retention
Associated Cement Company Ltd. 0.09 1.39 0.66 0.14
Bajaj Auto Ltd. 0.27 0.15 0.26 0.74
Bharat Heavy Electricals Ltd. 0.31 0.16 0.17 0.83
Cipla Ltd. -0.14 0.05 0.15 0.85
Dr.Reddy’s Laborotaries Ltd. 0.17 0.31 0.16 0.84
Grasim Industries Ltd. 0.16 0.83 0.29 0.71
Gujarat Ambuja Cements Ltd. 0.05 0.92 0.40 0.60
HDFC Ltd. 0.05 5.56 0.44 0.56
Hero Honda Ltd. 0.15 0.27 0.32 0.68
Hindalco Ltd. -0.15 0.21 0.12 0.88
Hindustan Lever Ltd. -0.18 0.08 0.68 0.32
Hindustan Petroleum Corporation Ltd. 0.32 0.42 0.31 0.69
Infosys Technologies Ltd. -0.03 0.00 0.13 0.87
Indian Tobacco Company Ltd. -0.12 0.42 0.26 0.74
Larsen & Toubro Ltd. -0.08 0.95 0.46 0.54
Ranbaxy Laboratories Ltd. 0.30 0.27 0.46 0.54
Reliance Energy Ltd. 0.06 0.45 0.22 0.78
Reliance Industries Ltd. -0.18 0.94 0.21 0.79
Satyam Computers Ltd. -0.16 0.74 0.13 0.87
Tata Motors Ltd 0.41 0.87 0.48 0.52
Tata Power Ltd. 0.05 0.68 0.25 0.75
Tata Iron and steel Company Ltd. 0.08 1.10 0.52 0.48
Wipro Ltd. -0.02 0.45 0.05 0.95
Zee Telefilms Ltd. -0.25 0.15 0.22 0.78
ABB Ltd. 0.09 0.06 0.46 0.54
Bharat Petrolium Corporation Ltd. 0.11 0.74 0.30 0.70
Britannia Industries Ltd. -0.16 0.69 0.25 0.75
Colgate Palmolive Ltd. -0.10 0.03 1.04 -0.04
Mahindra & Mahindra Ltd. -0.09 0.78 0.38 0.62
Steel Authority of India Ltd. 0.28 2.92 0.07 0.93
Mahanagar Telecom Nigam Ltd. -0.12 0.75 0.19 0.81
Table no.IV-5 Cross sectional values for the year 2003/04
Moving Average for 1998/99 to 2002/03 Company Return 2003/04 Debt-Equity Dividend Payout Retention
Associated Cement Company Ltd. 0.29 1.44 0.41 0.39
Bajaj Auto Ltd. 0.39 0.18 0.28 0.72
Bharat Heavy Electricals Ltd. 0.72 0.13 0.20 0.80
Cipla Ltd. 0.09 0.05 0.18 0.82
Dr.Reddy’s Laborotaries Ltd. -0.06 0.27 0.13 0.87
Grasim Industries Ltd. 0.82 0.78 0.30 0.70
Gujarat Ambuja Cements Ltd. 0.23 0.94 0.43 0.57
HDFC Ltd. 0.40 6.16 0.46 0.54
Hero Honda Ltd. 0.21 0.19 0.43 0.57
Hindalco Ltd. 0.30 0.22 0.15 0.85
Hindustan Lever Ltd. -0.21 0.11 0.75 0.25
Hindustan Petroleum Corporation Ltd. 0.28 0.42 0.38 0.62
Infosys Technologies Ltd. 0.17 0.00 0.12 0.88
Indian Tobacco Company Ltd. 0.22 0.30 0.28 0.72
Larsen & Toubro Ltd. 0.72 0.99 0.49 0.51
Ranbaxy Laboratories Ltd. 0.30 0.19 0.49 0.51
Reliance Energy Ltd. 0.82 0.36 0.26 0.74
Reliance Industries Ltd. 0.35 0.90 0.21 0.79
Satyam Computers Ltd. 0.07 0.58 0.14 0.86
Tata Motors Ltd 0.83 0.86 0.47 0.53
Tata Power Ltd. 0.77 0.67 0.25 0.75
Tata Iron and steel Company Ltd. 0.81 1.16 0.49 0.51
Wipro Ltd. -0.11 0.24 0.04 0.96
Zee Telefilms Ltd. -0.13 0.12 0.22 0.78
ABB Ltd. 0.68 0.05 0.39 0.61
Bharat Petroleum Corporation Ltd. 0.23 0.78 0.34 0.66
Britannia Industries Ltd. 0.08 0.64 0.24 0.76
Colgate Palmolive Ltd. -0.06 0.03 1.07 -0.07
Mahindra & Mahindra Ltd. 0.98 0.75 0.43 0.57
Steel Authority of India Ltd. 1.09 3.48 0.00 1.00
Mahanagar Telecom Nigam Ltd. -0.08 0.46 0.23 0.77
Table No IV- 6
Cross Sectional Regression Results
Model Y = a + b1 X1 + b2 X2
Year A b1 b2 Adjusted
R2
F - Value
1999/00 0.657
(2.284)**
-0.114
(0.754)
-1.131
(1.538)
0.023 1.356
2000/01 0.007396
(0.082)
0.0898
(1.831)
0.244
(-1.034)
0.78 2.27
2001/02 -0.236
(-1.816)
0.03636
(0.519)
0.306
(0.971)
-0.27 0.6
2002/03 0.01815
(0.275)
0.02234
(.07)
0.008058
(0.050)
-0.053 0.247
2003/04 0.335
(2.5992)* *
.09253
(1.693)
-0.137
(-0.438)
0.035 1.544
The numbers in the brackets show the “ t ” value. **It shows that the “ t ” value calculated is more than 1.96 and significant at 5% level.
The above table shows the year wise regression results of all the samples
studied. Here Y denotes the return on the equity shares, X1 denotes debt equity ratio
and X2 denotes dividend payout. “t” value calculated in the above table is significant
only for constant in the years 1999/00 and 2003/04. The “t” value calculated for the
debt equity ratio and dividend pay out ratio shows no evidence of any significant
association between the return on equity & debt equity ratio and the dividend payout
ratio. The adjusted R2 which shows the extent of variation explained by the model is
also very less. Thus from this analysis we can interpret that dividend payout do not
affect the return on equity.
SECTION-II TIME SERIES REGRESSION ANALYSIS
IV-7 ACC Ltd Return on Shares
Debt-Equity Ratio
Dividend Payout Ratio
Retention Ratio
1994/95 0.17 1.44 0.27 0.73
1995/96 0.10 0.9 0.26 0.74
1996/97 -0.25 0.81 0.6 0.4
1997/98 -0.36 1.22 1.7 -0.7
1998/99 0.07 1.45 0.4 0.6
1999/00 0.10 1.35 0 0
2000/01 0.08 1.4 0.79 0.21
2001/02 -0.04 1.52 0.39 0.61
2002/03 0.09 1.47 0.46 0.54
2003/04 0.29 1.2 0.4 0.6
IV-8 BAJAJ Return on Shares
Debt-Equity Ratio
Dividend Payout Ratio
Retention Ratio
1994/95 0.07 0.26 0.2 0.8
1995/96 0.12 0.16 0.19 0.81
1996/97 0.12 0.13 0.2 0.8
1997/98 0.05 0.12 0.23 0.77
1998/99 -0.01 0.13 0.2 0.8
1999/00 -0.18 0.14 0.22 0.78
2000/01 -0.46 0.17 0.4 0.6
2001/02 0.12 0.21 0.27 0.73
2002/03 0.27 0.24 0.3 0.7
2003/04 0.39 0.27 0.39 0.61
IV-9 BHEL Ltd. Return on Shares
Debt-Equity Ratio
Dividend Payout Ratio
Retention Ratio
1994/95 0.09 1.03 0.26 0.74
1995/96 0.08 0.76 0.14 0.86
1996/97 0.58 0.55 0.12 0.88
1997/98 0.46 0.28 0.1 0.9
1998/99 -0.11 0.1 0.13 0.87
1999/00 -0.52 0.06 0.14 0.86
2000/01 -0.28 0.17 0.26 0.74
2001/02 0.08 0.2 0.21 0.79
2002/03 0.31 0.13 0.25 0.75
2003/04 0.72 0.11 0.25 0.75
IV-10 Cipla Ltd Return on Shares
Debt-Equity Ratio
Dividend Payout Ratio
Retention Ratio
1994/95 -0.03 1.34 0.07 0.93
1995/96 -0.19 0.71 0.08 0.92
1996/97 -0.07 0.26 0.1 0.9
1997/98 0.25 0.07 0.12 0.88
1998/99 0.50 0.06 0.15 0.85
1999/00 0.77 0.05 0.15 0.85
2000/01 0.31 0.03 0.17 0.83
2001/02 -0.10 0.04 0.18 0.82
2002/03 -0.14 0.07 0.27 0.73
2003/04 0.09 0.13 0.33 0.67
IV-11DR.Reddy's Lab Ltd.
Return on Shares
Debt-Equity Ratio
Dividend Payout Ratio
Retention Ratio
1994/95 -0.36 0.11 0.19 0.81
1995/96 -0.34 0.07 0.16 0.84
1996/97 -0.28 0.15 0.26 0.74
1997/98 0.29 0.19 0.26 0.74
1998/99 0.77 0.24 0.17 0.83
1999/00 0.65 0.35 0.15 0.85
2000/01 0.13 0.56 0.1 0.9
2001/02 0.16 0.19 0.13 0.87
2002/03 0.17 0.01 0.11 0.89
2003/04 -0.06 0.02 0.15 0.85
IV-12 Grasim Industries Ltd.
Return on Shares
Debt-Equity Ratio
Dividend Payout Ratio
Retention Ratio
1994/95 -0.13 1.18 0.14 0.86
1995/96 -0.08 1.04 0.14 0.86
1996/97 -0.22 0.99 0.19 0.81
1997/98 -0.33 0.95 0.24 0.76
1998/99 -0.32 0.92 0.38 0.62
1999/00 -0.05 0.87 0.35 0.65
2000/01 0.22 0.71 0.21 0.79
2001/02 -0.08 0.69 0.27 0.73
2002/03 0.16 0.73 0.28 0.72
2003/04 0.82 0.63 0.19 0.81
IV-13 Gujarat Ambuja Cement Ltd.
Return on Shares
Debt-Equity Ratio
Dividend Payout Ratio
Retention Ratio
1994/95 -0.03 1.61 0.25 0.75
1995/96 0.14 1.04 0.26 0.74
1996/97 -0.03 0.87 0.32 0.68
1997/98 -0.12 0.98 0.43 0.57
1998/99 0.07 0.83 0.45 0.55
1999/00 0.18 0.74 0.18 0.82
2000/01 -0.02 0.94 0.45 0.55
2001/02 -0.06 1.1 0.5 0.5
2002/03 0.05 1.1 0.55 0.45
2003/04 0.23 0.83 0.47 0.53
IV-14 HDFC Ltd Return on Shares
Debt-Equity Ratio
Dividend Payout Ratio
Retention Ratio
1994/95 -0.36 5.81 0.24 0.76
1995/96 0.09 4 0.23 0.77
1996/97 0.12 3.67 0.26 0.74
1997/98 -0.01 4.27 0.35 0.65
1998/99 -0.07 4.79 0.34 0.66
1999/00 0.10 5.61 0.63 0.37
2000/01 0.45 6.37 0.35 0.65
2001/02 0.27 6.74 0.52 0.48
2002/03 0.05 7.31 0.44 0.56
2003/04 0.40 8.07 0.44 0.56
IV-15 Hero Honda Ltd.
Return on Shares
Debt-Equity Ratio
Dividend Payout Ratio
Retention Ratio
1994/95 -0.20 0.7 0.25 0.75
1995/96 0.04 0.57 0.24 0.76
1996/97 0.13 0.67 0.15 0.85
1997/98 0.69 0.55 0.11 0.89
1998/99 0.80 0.35 0.23 0.77
1999/00 0.31 0.19 0.23 0.77
2000/01 -0.05 0.11 0.26 0.74
2001/02 0.36 0.14 0.75 0.25
2002/03 0.15 0.16 0.7 0.3
2003/04 0.21 0.15 0.62 0.38
IV-16 Hindalco Ltd.
Return on Shares
Debt-Equity Ratio
Dividend Payout Ratio
Retention Ratio
1994/95 0.20 0.31 0.088 0.912
1995/96 0.22 0.28 0.07 0.93
1996/97 0.20 0.26 0.09 0.91
1997/98 -0.06 0.26 0.09 0.91
1998/99 -0.33 0.24 0.09 0.91
1999/00 0.06 0.18 0.11 0.89
2000/01 0.21 0.16 0.15 0.85
2001/02 0.02 0.19 0.15 0.85
2002/03 -0.15 0.31 0.24 0.76
2003/04 0.30 0.38 0.2 0.8
IV-17 HLL Ltd Return on Shares
Debt-Equity Ratio
Dividend Payout Ratio
Retention Ratio
1994/95 -0.29 0.2 0.6 0.4
1995/96 -0.02 0.22 0.63 0.37
1996/97 0.26 0.19 0.66 0.34
1997/98 0.43 0.15 0.66 0.34
1998/99 0.42 0.12 0.66 0.34
1999/00 0.19 0.06 0.72 0.28
2000/01 0.03 0.04 0.7 0.3
2001/02 -0.08 0.02 0.68 0.32
2002/03 -0.18 0.3 1 0 2003/04 -0.21
IV- 18 HPCL Ltd Return on Shares
Debt-Equity Ratio
Dividend Payout Ratio
Retention Ratio
1994/95 -0.21 0.49 0.1 0.9
1995/96 -0.14 0.24 0.14 0.86
1996/97 0.08 0.31 0.15 0.85
1997/98 0.18 0.35 0.17 0.83
1998/99 -0.26 0.28 0.306 0.694
1999/00 -0.51 0.4 0.307 0.693
2000/01 0.14 0.53 0.344 0.656
2001/02 0.38 0.54 0.43 0.57
2002/03 0.32 0.36 0.49 0.51
2003/04 0.28 0.21 0.44 0.56
IV- 19 Infosys Technologies Ltd.
Return on Shares
Debt-Equity Ratio
Dividend Payout Ratio
Retention Ratio
1994/95 0.23 0.07 0.17 0.83
1995/96 0.13 0.07 0.17 0.83
1996/97 0.45 0.02 0.115 0.885
1997/98 1.06 0 0.128 0.872
1998/99 1.64 0 0.098 0.902
1999/00 1.73 0 0.1125 0.8875
2000/01 0.17 0 0.12 0.88
2001/02 -0.45 0 0.17 0.83
2002/03 -0.03 0 0.12 0.88
2003/04 0.17 0 0.7824 0.2176
IV- 20 ITC Ltd. Return on Shares
Debt-Equity Ratio
Dividend Payout Ratio
Retention Ratio
1994/95 -0.23 1.03 0.51 0.49
1995/96 -0.22 0.83 0.235 0.765
1996/97 0.14 0.62 0.3113 0.6887
1997/98 0.59 0.68 0.23 0.77
1998/99 0.47 0.66 0.24 0.76
1999/00 -0.02 0.39 0.2833 0.7167
2000/01 -0.05 0.24 0.2687 0.7313
2001/02 -0.06 0.15 0.2808 0.7192
2002/03 -0.12 0.04 0.305 0.695
2003/04 0.22 0.02 0.35 0.65
IV- 21 L&T Ltd. Return on Shares
Debt-Equity Ratio
Dividend Payout Ratio
Retention Ratio
1994/95 -0.13 0.33 0.3943 0.6057
1995/96 -0.09 0.37 0.356 0.644
1996/97 -0.13 0.53 0.4 0.6
1997/98 0.00 0.75 0.335 0.665
1998/99 0.08 0.88 0.3815 0.6185
1999/00 0.08 0.98 0.5257 0.4743
2000/01 0.01 1.06 0.566 0.434
2001/02 -0.27 1.06 0.503 0.497
2002/03 -0.08 0.97 0.4865 0.5135
2003/04 0.72 0.72 0.4215 0.5785
IV-22 Ranbaxy Laboratories Ltd.
Return on Shares
Debt-Equity Ratio
Dividend Payout Ratio
Retention Ratio
1994/95 -0.05 0.83 0.181 0.819
1995/96 -0.02 0.63 0.1757 0.8243
1996/97 0.02 0.51 0.2557 0.7443
1997/98 0.03 0.42 0.3128 0.6872
1998/99 0.41 0.34 0.5265 0.4735
1999/00 0.27 0.26 0.49 0.51
2000/01 -0.04 0.19 0.525 0.475
2001/02 0.11 0.12 0.46 0.54
2002/03 0.30 0.04 0.4284 0.5716
2003/04 0.30 0.01 0.448 0.552
IV-23 Reliance Energy Ltd
Return on Shares
Debt-Equity Ratio
Dividend Payout Ratio
Retention Ratio
1994/95 -0.35 1.38 0.11 0.89
1995/96 -0.17 0.85 0.1964 0.8036
1996/97 0.12 0.74 0.2401 0.7599
1997/98 0.13 0.68 0.21 0.79
1998/99 -0.14 0.56 0.2296 0.7704
1999/00 0.07 0.42 0.222 0.778
2000/01 0.05 0.31 0.2133 0.7867
2001/02 0.00 0.26 0.2095 0.7905
2002/03 0.06 0.25 0.4211 0.5789
2003/04 0.82 0.39 0.2166 0.7834
IV-24 Reliance Industries Ltd.
Return on Shares
Debt-Equity Ratio
Dividend Payout Ratio
Retention Ratio
1994/95 -0.25 0.49 0.188 0.812
1995/96 -0.22 0.49 0.233 0.767
1996/97 -0.02 0.73 0.2262 0.7738
1997/98 0.27 0.9 0.2425 0.7575
1998/99 0.00 1.01 0.2432 0.7568
1999/00 0.35 1.07 0.1941 0.8059
2000/01 0.47 0.93 0.1885 0.8115
2001/02 -0.04 0.78 0.2045 0.7955
2002/03 -0.18 0.73 0.1968 0.8032
2003/04 0.35 0.69 0.1598 0.8402
IV-25 Satyam Computers Ltd.
Return on Shares
Debt-Equity Ratio
Dividend Payout Ratio
Retention Ratio
1994/95 1.17 0.2 0.309 0.691
1995/96 0.29 0.49 0.307 0.693
1996/97 -0.21 0.5 0.2862 0.7138
1997/98 1.06 0.83 0.2977 0.7023
1998/99 1.86 1.37 0.1178 0.8822
1999/00 1.91 1.04 0.109 0.891
2000/01 0.03 0.4 0.0535 0.9465
2001/02 -0.72 0.06 0.0865 0.9135
2002/03 -0.16 0.01 0.3358 0.6642
2003/04 0.07 0.01 0.2572 0.7428
IV-26 TATA MOTORS Ltd.
Return on Shares
Debt-Equity Ratio
Dividend Payout Ratio
Retention Ratio
1994/95 -0.10 1.14 0.2529 0.7471
1995/96 0.25 0.64 0.2698 0.7302
1996/97 0.06 0.63 0.2894 0.7106
1997/98 -0.19 0.79 0.5254 0.4746
1998/99 -0.34 0.9 0.8742 0.1258
1999/00 -0.42 0.86 1 0
2000/01 -0.40 0.86 0 1
2001/02 -0.08 0.93 0 1
2002/03 0.41 0.74 0.4808 0.5192
2003/04 0.83 0.44 0.3927 0.6073
IV-27 Tata Power Ltd.
Return on Shares
Debt-Equity Ratio
Dividend Payout Ratio
Retention Ratio
1994/95 -0.44 1.01 0.2353 0.7647
1995/96 -0.15 0.74 0.1735 0.8265
1996/97 -0.01 0.56 0.3611 0.6389
1997/98 -0.10 0.62 0.2874 0.7126
1998/99 -0.23 0.73 0.287 0.713
1999/00 -0.35 0.7 0.2291 0.7709
2000/01 0.20 0.67 0.2731 0.7269
2001/02 0.25 0.66 0.1949 0.8051
2002/03 0.05 0.58 0.2708 0.7292
2003/04 0.77 0.42 0.2969 0.7031
IV-28 Tisco Ltd Return on Shares
Debt-Equity Ratio
Dividend Payout Ratio
Retention Ratio
1994/95 0.09 1.34 0.4206 0.5794
1995/96 0.03 1.15 0.2774 0.7226
1996/97 -0.14 1.03 0.3883 0.6117
1997/98 -0.15 1.08 0.5029 0.4971
1998/99 -0.20 1.16 0.5786 0.4214
1999/00 -0.17 1.13 0.4068 0.5932
2000/01 0.11 1.01 0.3932 0.6068
2001/02 -0.12 1.13 0.729 0.271
2002/03 0.08 1.35 0.3289 0.6711
2003/04 0.81 0.99 0.2383 0.7617
IV-29 Wipro Ltd Return on Shares
Debt-Equity Ratio
Dividend Payout Ratio
Retention Ratio
1994/95 0.53 1.34 0.01186 0.98814
1995/96 0.38 1.35 0.08 0.92
1996/97 0.03 1.35 0.0661 0.9339
1997/98 1.01 1.11 0.0883 0.9117
1998/99 1.68 0.79 0.0748 0.9252
1999/00 1.87 0.31 0.0422 0.9578
2000/01 0.02 0.04 0.0221 0.9779
2001/02 -0.77 0.02 0.0268 0.9732
2002/03 -0.02 0.02 0.0322 0.9678
2003/04 -0.11 0.02 0.8323 0.1677
IV-30 Zee telefilms ltd.
Return on Shares
Debt-Equity Ratio
Dividend Payout Ratio
Retention Ratio
1994/95 -0.19 0.02 0.277 0.723
1995/96 -0.33 0.08 0.3136 0.6864
1996/97 -0.45 0.18 0.3203 0.6797
1997/98 0.51 0.27 0.2707 0.7293
1998/99 1.25 0.29 0.1895 0.8105
1999/00 2.10 0.06 0.2395 0.7605
2000/01 -0.06 0.06 0.1638 0.8362
2001/02 -1.28 0.09 0.2332 0.7668
2002/03 -0.25 0.1 0.27 0.73
2003/04 -0.13 0.11 0.4 0.6
IV-31 ABB Ltd Return on Shares
Debt-Equity Ratio
Dividend Payout Ratio
Retention Ratio
1994/95 -0.17 0.15 0.2 0.8000
1995/96 -0.10 0.17 0.16 0.8400
1996/97 -0.02 0.13 0.35 0.6500
1997/98 -0.01 0.07 0.6 0.4000
1998/99 -0.12 0.07 0.62 0.3800
1999/00 -0.45 0.08 0.47 0.5300
2000/01 -0.39 0.03 0.35 0.6500
2001/02 0.12 0.03 0.27 0.7300
2002/03 0.09 0.02 0.25 0.7500
2003/04 0.68 0.01 0.22 0.7800
IV-32 BPCL Ltd Return on Shares
Debt-Equity Ratio
Dividend Payout Ratio
Retention Ratio
1994/95 -0.48 0.32 0.17 0.83
1995/96 -0.25 0.3 0.13 0.87
1996/97 0.14 0.49 0.13 0.87
1997/98 0.11 0.61 0.16 0.84
1998/99 -0.26 0.56 0.3 0.7
1999/00 -0.24 0.65 0.33 0.67
2000/01 0.05 0.89 0.3 0.7
2001/02 0.07 0.99 0.39 0.61
2002/03 0.11 0.82 0.4 0.6
2003/04 0.23 0.56 0.35 0.65
IV-33 Britannia Ind Ltd.
Return on Shares
Debt-Equity Ratio
Dividend Payout Ratio
Retention Ratio
1994/95 -0.20 0.52 0.4 0.6
1995/96 -0.32 0.74 0.46 0.54
1996/97 -0.04 0.7 0.46 0.54
1997/98 0.47 0.73 0.35 0.65
1998/99 1.03 0.8 0.29 0.71
1999/00 0.07 0.68 0.27 0.73
2000/01 -0.49 0.67 0.24 0.76
2001/02 -0.06 0.59 0.1 0.9
2002/03 -0.16 0.45 0.29 0.71
2003/04 0.08 0.24 0.26 0.74
IV-34 Colgate Pal Ltd
Return on Shares
Debt-Equity Ratio
Dividend Payout Ratio
Retention Ratio
1994/95 -0.05 0.01 0.85 0.15
1995/96 -0.23 0.01 0.84 0.16
1996/97 -0.18 0.01 0.8 0.2
1997/98 0.02 0.02 0.55 0.45
1998/99 -0.16 0.02 1 0
1999/00 -0.37 0.02 0.87 0.13
2000/01 -0.03 0.04 1.9 -0.9
2001/02 -0.06 0.05 0.88 0.12
2002/03 -0.10 0.02 0.69 0.31
2003/04 -0.06 0.01 0.85 0.15
IV-35 M & M Ltd.
Return on Shares
Debt-Equity Ratio
Dividend Payout Ratio
Retention Ratio
1994/95 -0.30 0.66 0.3 0.7
1995/96 -0.19 0.46 0.26 0.74
1996/97 0.05 0.7 0.27 0.73
1997/98 0.05 0.98 0.25 0.75
1998/99 -0.13 1 0.28 0.72
1999/00 0.04 0.69 0.26 0.74
2000/01 -0.28 0.52 0.55 0.45
2001/02 -0.57 0.71 0.55 0.45
2002/03 -0.09 0.83 0.5 0.5
2003/04 0.98 0.56 0.34 0.66
IV-36 SAIL Ltd Return on Shares
Debt-Equity Ratio
Dividend Payout Ratio
Retention Ratio
1994/95 -0.48 1.9 0.22 0.78
1995/96 -0.38 1.82 0.2 0.8
1996/97 -0.26 1.93 0.22 0.78
1997/98 -0.51 2.2 0.34 0.66
1998/99 -0.56 2.64 0 1
1999/00 -0.16 2.95 0 1
2000/01 0.02 2.99 0 1
2001/02 -0.30 3.82 0 1
2002/03 0.28 5.02 0 1
2003/04 1.09 2.86 0 1
IV-37 MTNL Ltd. Return on Shares
Debt-Equity Ratio
Dividend Payout Ratio
Retention Ratio
1994/95 -0.06 3.33 0.1 0.9
1995/96 0.01 2.8 0.16 0.84
1996/97 0.19 2.32 0.15 0.85
1997/98 0.18 1.63 0.18 0.82
1998/99 -0.14 0.91 0.17 0.83
1999/00 -0.08 0.52 0.2 0.8
2000/01 -0.08 0.39 0.2 0.8
2001/02 -0.29 0.32 0.22 0.78
2002/03 -0.12 0.14 0.36 0.64
2003/04 -0.08 0 0.26 0.74
Table No IV-38
Time Series Regression Results for 31 Companies Studied (1995-2000)
Model Yi t = a + b1t X1t + b2 t X2 t
Companies a b1 b2 Adj. R2 F- Value
ACC Ltd. -0.08983
(-0.346)
0.211
(1.103)
-0.293
(-2.876)
0.479 5.132
Bajaj Auto Ltd. -0.144
(-0.525)
2.801
(2.017) **
-0.1228
(-1.220)
0.194 2.084
BHEL Ltd. .07663
(0.169)
0.171
(0.392)
.03709
(0.017)
-0.258 .077
Cipla Ltd. 0.456
(1.481)
-.423
(-1.468)
-1.239
(-832)
0.017 1.079
Dr Reddy Lab .05752
(-118)
.957
(1.17)
-.741
(-.302)
-.033 .856
Grasim Ind. Ltd. 1.890
(3.812) * *
-1.588
(-3.706)
-2.122
(-2.280)
.593 7.533
Guj Ambu. Ltd. .352
(1.747)
-.211
(-1.403)
-.206
(-.876)
.054 1.255
HDFC Ltd. -.314
(-.969)
.04801
(.761)
.386
(.534)
-.023 .898
Hero Honda Ltd. .541
(1.282)
-.422
(-.689)
-.404
(-.640)
-.194 .269
Hindalco Ltd. .06037
(-.201)
.681
(.605)
-0.384
(-.282)
-.219 .190
HLL Ltd. .440
(.730)
-.532
(-.459)
-.396
(-.432)
-.2 .334
HPCL Ltd. -.317
(-.884)
.146
(.179)
1.003
(1.468)
.027 1.125
Infosys Tech Ltd. .813
(2.127) **
-6.921
(-.782)
-.970
(-783)
-.109 .557
ITC Ltd. .499
(1.374)
.09787
(.348)
-1.569
(-1.320)
-0.029 .872
L & T .181
(.298)
.173
(.320)
-.675
(-.353)
-.262 .066
M & M .686
(.891)
-.398
(-.500)
-1.256
(-1.094)
-.086 .644
Ranbaxy Lab Ltd -.05151
(-.154)
-.131
(-.408)
.599
(.963)
.265 2.626
Reliance Energy .528
(.975)
-.543
(-1.496)
-.665
(-.403)
.076 1.368
Reliance Industry .149
(.303)
.995
(3.207) * *
-4.111
(-1.836)
.529 6.045
Satyam Com Ltd -.588
(-1.045)
1.683
(3.708) * *
1.344
(.703)
.572 7.024
Tata Motors Ltd 1.288
(2.958) * *
-1.488
(-2.908)
-.262
(-.870)
.443 4.581
Tata Power Ltd. 1.660
(2.325) * *
-2.010
(-3.413)
-1.210
(-.731)
.543 6.351
TISCO Ltd. 1.066
(1.303)
-.450
(-.649)
-1.223
(-2.061)
.240 2.418
Wipro Ltd. .292
(.592)
.350
(.683)
-.413
(-.328)
-.157 .388
Zee Telefilms .772
(.523)
2.547
(.692)
-3.652
(-.738)
-.108 .561
ABB Ltd .419
(1.469)
-2.470
(-1.404)
-.768
(-1.259)
.105 1.529
BPCL Ltd. -.369
(-1.720)
.753
(1.529)
-.560
(-.538)
.123 1.632
Britannia Ind Ltd. -.305
(-.470)
.896
(.944)
-.654
(-.45)
-.135 .466
Colgate Palmolive -.167
(-1.465)
2.544
(.732)
-.01124
(-.086)
-.179 .316
SAIL -.165
(-.215)
.06645
(.297)
-1.499
(-.885)
.029 1.136
MTNL -.192
(-.714)
.07583
(1.270)
.245
(.240)
.097 1.485
The numbers in the brackets show the “ t ” value. * * It shows that the “t” value calculated is more than 1.96 and significant at 5% level.
The above table gives the regression results for each company for ten years.
Here Y denotes the return on equity shares, X1 denotes the debt equity ratio and X2
denotes the dividend payout ratio. The “t” value of debt equity ratio is significant only
for three companies namely Bajaj Auto Ltd., Reliance Industry Ltd. and Satyam
Computers Ltd. The adjusted R2 value are 0194, 0.529, 0.574 respectively. It shows
that for these companies there exist a significant association between the debt and the
share value. But as a whole for the samples selected 28 samples shows no evidence of
relationship between the debt and return on equity and all the 31 samples showed no
relationship existing between the dividend and return on equity.
CHAPTER V
DISCUSSION
The study started with reviewing the previous research papers explaining the
impact of the dividend decisions on the value of the firm. The most popular research
result is that of Modigliani and Miller. They prove that dividend is irrelevant. As against
this theory Walter and Gordon through their model explained that dividend is very
relevant. Here the study focused on finding out whether dividend affects the value of
the firm or not.
Through convenient sampling 31 Indian Public Limited company’s actual data
were analysed. Here under the study the effect on the return on equity is considered as
an indicator to the effect on the value of the firm. Using a multiple regression model an
attempt is made to establish the relationship between the return on equity & debt and
dividend of the companies selected for the study. Here the expected values of the
dividend pay out and debt to equity is regressed with actual return to find out the
association, if any.
The results of the study show that the impact of the dividend on the value of the
firm is not significant. Out of the 31 sample companies studied only three companies
showed a significant association between the debt and the return on equity, whereas
none of the company showed any evidence of significant relation between dividend and
return on shares. Thus it can be observed that in the cross sectional analysis of the
companies the Return on Equity shares does not show any significant relationship with
Debt Equity and dividend Payout. But in case of Company wise time series analysis
certain companies, as explained above, shows relationship between the variables. Thus
we infer that investors do not give importance to capital structure and the dividend
policy of the companies as a whole. They give importance to the capital structure of
selected companies, out of the samples, when they invest.
FINDINGS OF THE STUDY Cross Sectional Regression Analysis
¾�The results of the Cross sectional Regression for the Five Years from 1994/95 to
2003/04 (Table No.6) Shows that for the selected samples there is no evidence
of any significant relationship between Return on Equity & the Debt Equity ratio
and dividend payout.
Time Series regression Analysis
The results of the Time Series Regression for the Ten-year data (1994/95 to
2003/04) as per the Table No.38 show that there does not exist any significant
relationship between the Return on equity & Debt Equity and Dividend payout other
than for the following samples.
¾�Bajaj Auto Ltd.: The Regression analysis shows that the “t” value
calculated for the variable X1 i.e.; Debt Equity Ratio is 2.017. This
shows that it is significant at 5% level. The coefficient of the variable
of Debt- Equity Ratio (b1) is 2.801; it also shows that to Bajaj Auto
Ltd. there exist a significant relationship between the Return on equity
and Capital Structure.
¾�Reliance Industry: This sample also shows that there exist a
significant relationship between the Return on the Equity and the Debt-
Equity Ratio. The “t” calculated value is 3.207 and the coefficient is
0.995, for Debt Equity Ratio.
¾�Satyam Computers Ltd.: The Capital structure seems to have a
relationship with the Return on equity shares in this sample also. For
the variable, Debt Equity Ratio the “t” calculated value is 3.708 and
the Coefficient is 1.683.
Hypothesis Testing
H0: Dividend Policies do not affect the value of the firm.
H1: Dividend Policies do affect the value of the firm.
The hypothesis is tested by using “t” test significant at 5%.
The Cross sectional Regressions results as per table no. 6 shows the “t” value
calculated for the period of analysis i.e.; 1999/00 to 2003/04. It can be seen that the “t”
values calculated show no significant relationship between the return on equity &
dividend payout. The Time series Regression results as per table no. 38 shows the “t”
value calculated for each sample for ten year’s value (1994/95 to 200 3/04). Here also
there is no evidence of relationship between return on equity share prices and dividend
payout.
Thus at 5% level of significance using “t” test H0 IS ACCEPTED, which
implies there is no effect.
Dividend and Debt Patterns The descriptive cross sectional tables and Time series tables explain the trend in the
various ratios of the companies under study for the various periods.
¾�Software companies such as Infosys Technologies Ltd. (Line Diagram IV.13),
Satyam Computers Ltd. (Line Diagram IV.19) and Wipro Ltd. (Line Diagram
IV.23) pay comparatively very low rate of dividend and most of the earnings are
retained for investment in the business.
¾�FMCG companies like Hindustan Lever Ltd. and Colgate Palmolive Ltd. Pay
high rate of dividend and retained earnings are less, it shows that the investment
opportunities in this sector shows a decreasing trend and the growth rate is
limited.
¾�The dividend payout of the Automobile companies under study ranges from .25
to 1.
¾�The pharmaceutical companies under study have a dividend payout of less than
0.5. The Payout ratios are almost consistent for each company in this group. It
has more growth prospective, as the retention ratio is high.
¾�Out of the companies studied HDFC Ltd showed a high rate of Debt equity
ratio. Its debt equity ratio is touching a very alarming rate of 8:1 for the year
2003/04.
SUMMARY AND CONCLUSION The main objectives of the study were
• To find out whether dividend decisions affect the share prices.
• To find the extent to which the Debt Equity ratio affects the share prices.
• To describe the companies under study in terms of their dividend payout ratio,
Retention ratio and Debt Equity ratios.
The study was conducted in three stages
1. Collection of the required data namely the Income statement, Balance
Sheet and the share prices for ten years (1995-2004) of the samples
under study.
2. Calculation and tabulation of the variables under study namely Dividend
payout Ratio, Retention Ratio, Debt-Equity Ratio and Return on Equity
share prices.
3. Analysis and interpretation
The study was focused on finding the relationship existing between the
dependent variable; return on equity share prices and the independent variables,
dividend and debt equity ratio. The data were collected through verification of financial
statements of the company and the historical price data available in the NSE and BSE
websites. The data were interpreted using descriptive statistics and Multiple Regression
Analysis.
The salient findings of the study are:
• There is no significant effect of dividend / retention and debt equity ratio
on share prices.
• Out of the variables under study it can be noticed that dividend and share
prices does not have a notable relationship between each other.
• Out of the sample under study the software companies showed a
deviation from others by having least Debt Equity some time even 0 for
more than 5 years and least Dividend Payout Ratio and still maintaining
a good rate of return on share prices.
LIMITATIONS
• The sampling technique used is a convenient sampling technique, which limits
the generalization of the findings.
• The data collected are historical data and no adjustment is made to capture the
abnormal events which affect the variables under study
RECOMMENDATIONS
• The same study can be conducted including more samples and for a longer
period.
• The relationship existing between the Debt-Equity Ratio and Dividend Payout
can be studied in depth.
Bibliography
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¾�www.beginersinvest.about.com
¾�www.finance24.com
¾�www.investopedia.com
¾�www.yahoofinance.com
¾�www.investorwords.com
¾�www.peacedividend.com
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