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uunniivveerrssiittyy..

Place: Bangalore SREERAM P N Date:

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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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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


23


24


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


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



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


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


Larsen & Toubro Ltd. -0.27 0.84 0.44 0.56



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


ABB Ltd. 0.12 0.08 0.48 0.52



Colgate Palmolive Ltd. -0.06 0.02 1.02 -0.02


Steel Authority of India Ltd. -0.30 2.54 0.11 0.89


Table no.IV-4 Cross sectional values for the year 2002/03



Bajaj Auto Ltd. 0.27 0.15 0.26 0.74


Cipla Ltd. -0.14 0.05 0.15 0.85




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



Infosys Technologies Ltd. -0.03 0.00 0.13 0.87


Larsen & Toubro Ltd. -0.08 0.95 0.46 0.54



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


Wipro Ltd. -0.02 0.45 0.05 0.95


ABB Ltd. 0.09 0.06 0.46 0.54







Table no.IV-5 Cross sectional values for the year 2003/04



Bajaj Auto Ltd. 0.39 0.18 0.28 0.72


Cipla Ltd. 0.09 0.05 0.18 0.82

Dr.Reddy’s Laborotaries Ltd. -0.06 0.27 0.13 0.87



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



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




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


Wipro Ltd. -0.11 0.24 0.04 0.96


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


Mahindra & Mahindra Ltd. 0.98 0.75 0.43 0.57



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


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


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


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


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


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


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


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


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


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


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


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


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


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


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


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


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


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


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


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


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


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


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


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


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


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


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


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


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


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


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

BOOKS

¾�Financial Management, Fourth Edition 2004, M Y Khan and P K Jain, Tata

McGraw Hill Publications.

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Ltd.

¾�Business Research Methods, Sixth Edition 1999, Donald R Cooper & Pamela S

Schindler, Tata McGraw Hill Publications.

¾�Statistical Methods, 31St Edition (2001), S.P Gupta, Sultan Chand & Sons.

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WEBSITES

¾�www.beginersinvest.about.com

¾�www.finance24.com

¾�www.investopedia.com

¾�www.yahoofinance.com

¾�www.investorwords.com

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