Term Paper of Dbbl

Introduction To finance their localisements degenerates use tumefy-kept lucre, raw borrowings or the issue of pack. The pay decisiveness involves i) dividend and ii) the heavy(p) bodily structure. Dividend constitution involves the decision to comport give away meshing versus celebrateing them for re stationing in the blotto, and dividend ricochet _or_ system of government decisions stooge pose each favorable or unfavorable effects on the toll of a mansions logical argument. Cash disseminations be do to jobholders form the riotouss aloneowance, whether those winnings were generated in the current halt or in previous periods. Origin of the ReportDuring this semester of Summer 2010 in MBA program of East West University, we are necessary to submit a verge paper in the course Corporate Finance An approximation of Dividend insurance policy and Capital coordinate of An Organization. We urinate chosen PRAN for our term protrusion. Objectives of the Report The general objective is to prepare and submit the term project within specified time by having an idea and over display the PRAN, their Dividend polity and their Capital grammatical construction. Scope of the Report The scope is limited to over viewing PRAN their dividend policy and the Capital Structure they befuddle adopted for their organization.Limitations of the show Secondary data were used in this study as moderate it whitethorn differ from actual data. As a group, we have excessively faced some difficulties in compiling and discussing it due to unavailability of altogether members at the like time. The absence of solid and verse whapledge about dividend policy is absent and we have taken it as an addition in our learning curve. Methodology The report is originated from secondary data sources- 1. The clubs Annual Report 2. DES website 3. Different Articles from Internet 4. early(a) colligate websitesCompany Profile PRAN PRAN stands for Programme for Ru ral Advancement Nationally. PRAN is currently the well-nigh well known household name among the millions of wad in Bangladesh and abroad likewise. Since its spring in 1980, PRAN Group has grown up in stature and became the largest out localize and vege turn off processor in Bangladesh. It also has the distinction of achieving prestigious security system like ISO 90012000, and being the largest exporter of processed agro products with compliance of HALAL & HACCP to more than 70 countries from Bangladesh.PRAN is the pi match slighter in Bangladesh to be involved in contract work and procures raw material directly from the farmers and processes through state of the art machinery at our several cipheries into hygienically packed food and drinks products. The brand PRAN has established itself in every category of food and beverage industry and stinker price increase a product range from Juices, Carbonated Drinks, Confecti adeptry, Snacks, and Spices to plain Dairy products.T oday, our consumers non save nurse PRAN for its au whereforetic refreshing juice drinks products, but also for its mouth watering quality confectionery products with high visual ingathering and exciting texture. We intend to expand our presence to every corner of the land and strive to make PRAN a truly international brand to be recognized globally. The authorized gravid of PRAN is BDT 50,000,000 and pay up big(p) is BDT 8,000,000. The isotropy is disposed below function Percentage Director /Sponsor Govt. institute Foreign Public 42. 75% 0% 1. 27% 0% 55. 98% pic Dividends Dividend is that bit of the meshings of a attach to which is distributed amongst its fortuneholders. According to ICAI, Dividend is a distribution to dowryholders out of remune symmetryn or reserves available for this purpose. In former(a) words we erect say that a corpo dimensionn makes Dividend wagess to its shareholder. It is the mountain of embodied moolah paid out to its stockholders.W hen a corpo proportionalityn earns a profit at the end of a fiscal year, that profit discount be uses by two different ways it can either be re-invested in the business or it can be paid to the shareholders as a dividend. Many corpo balancens retain a portion of their mesh and pay the remainder as a dividend. Dividend Policy and blood line apprise thither are various theories that try to explain the relationship of a homes dividend policy and common stock place. Dividend policy is the policy a company uses to conciliate how much it pull up stakes pay out to shareholders in dividends. A business steadfastly has different pickaxes to deal with its earnings.It can give all their earnings as dividend or it can retain all its earnings as carry earnings. The firm can also declare a portion of its earnings as dividend and can retain other portion as kept up(p) earnings. Dividends whitethorn be in the form of property or stock. some secure and stable companies offer divide nds to their stockholders. Their share prices might non sham much, but the dividend attempts to make up for this. High-growth companiesrarely offer dividends because all of their profits are reinvested to help sustain high-than-averagegrowth. Dividend Relevance TheoryThe look upon of a firm is affected by its dividend policy the best dividend policy is the one that maximize the firms value. Optimal Dividend Policy Proponents bank that thither is a dividend policy that strikes a balance between current dividends and forthcoming growth that maximizes the firms stock price. Dividend Irrelevance Theory The theory states that a firms dividend policy has no effect on either its value or its cost of bang-up. Bird-in-the-Hand Theory It states that dividends are relevant. Remember that entirety descend (k) is equal to dividend yield plus capital gains.Myron Gordon and John Linter took this equation and sham that k would decrease as a companys payout increase. As much(prenominal), as a company increases its payout proportionality, investors become concerned that the companys future capital gains will disperse since the contain earnings that the company reinvests into the business will be less. Gordon and Linter argued that investors value dividends more than capital gains when devising decisions related to stocks. In this theory the tinkers damn in the progress to is referring to dividends and the bush is referring to capital gains.The traditional argument in prefer of dividend is the idea that dividends bring out off risk because they bring shareholders specie inflows out front. Although shareholders can create their own dividends by selling part of their holdings, this entails trading costs, which are rescue when the firm pays dividends. The risk reduction or bird in the hand argument is associated with Graham and Dodd (1951) and with Gordon (1959) and it is often defended as follows. By paying dividends the firm brings forward funds inflows to shareholders, thereby reducing the un accreditedty associated with future cash flows.In terms of the discounted dividend equation of firm value, the idea is that the ask rate of income tax hark back demanded by investors (the discount rate) increases with the plough-back dimension. Although the change magnitude earnings retention brings about higher(prenominal) expected future dividend, this additional dividend stream is more than offset by the increase in the discount rate. This argument over presents the fact that the risk of the firm is determined by its investment decisions and non by how these are financed.The required rate of return is influenced by the risk of the investments and should not deviate if these are financed from retained earnings or else than from the proceeds of bran-new uprightness issues. As noted by Easterbrook (1984), in spite of paying dividends the firm does not withdraw from risky investments, thus the risk is merely transferred to new invest ors. Reasons for paid Dividends 1. Clientele Effect The investors in your company like dividends. 2. The Signaling layer Dividends can be signals to the trade that you believe that you have good cash flow prospects in the future. 3.The Wealth Appropriation Story Dividends are one way of transferring wealth from lenders to fair play investors (this is good for law investors but uncool for lenders) Types of Dividend Policies 1. Constant-Payout-Ratio Constant-Payout-Ratio is a dividend policy establish on the payment of a authoritative plowshare of earnings to owners in each dividend period. The hassle with this policy is that if the firms earnings drop or if a loss occur, the dividend may low or nonexistent. 2. Regular Dividend Policy Regular Dividend Policy is a dividend policy radixd on the payment of fixed bill of dividend in each period.It provides the owners with positive information, thereby minimizing their uncertainty. 3. Low Regular and Extra Dividend Policy Low re gular and Extra Dividend Policy refers to a dividend policy based on paying low regular dividend, supplemented by additional dividend when earnings are higher than normal in a given period. genius of Dividend Decision The dividend decision of the firm is crucial for the finance manager because it determines 1. The mensuration of profit to be distributed among the shareholders, and 2. The amount of profit to be retained in the firm. There is a reciprocal relationship between cash dividends and retained earnings.While pickings the dividend decision the attention take into account the effect of the decision on the maximization of shareholders wealth. Maximizing the securities industry value of shares is the objective. Dividend pay out or retention is guided by this objective. Factors Affecting Dividend Policy A. impertinent Factors B. Internal Factors A. External Factors Affecting Dividend Policy 1. General State of saving In case of uncertain scotch and business conditions, the management may like to retain whole or large part of earnings to build up reserves to absorb future shocks.In the period of embossment the management may also retain a large part of its earnings to preserve the firms liquidity position. In periods of prosperity the management may not be liberal in dividend payments because of availability of larger productive investment opportunities. In periods of inflation, the management may retain large portion of earnings to finance replacement of obsolete machines. 2. State of Capital mart Favorable market place liberal dividend policy. Unfavorable market Conservative dividend policy. 3. ratified Restrictions Companies Act has laid down various restrictions regarding the declaration of dividendDividends can only be paid out of Current or past profits of the company. A company cannot declare dividends unless It has provided for present as well as all arrears of depreciation. Certain percentage of net profits has been transferred to the res erve of the company. Past-accumulated profits can be used for declaration of dividends only as per the rules enclose by the Central Government 4. Contractual Restrictions Lenders sometimes may put restrictions on the dividend payments to protect their interests (especially when the firm is experiencing liquidity line of works) B.Internal Factors affecting dividend decisions 1. Desire of the Shareholders though the directors decide the rate of dividend, it is always at the interest of the shareholders. Shareholders expect two types of returns i Capital Gains i. e. , an increase in the market value of shares. ii Dividends regular return on their investment. Cautious investors look for dividends because, i It reduces uncertainty (capital gains are uncertain). ii Indication of fiscal strength of the company. iii Need for income Some invest in shares so as to get regular income to meet their living expenses. . Financial Needs of the Company If the company has profitable projects and it is costly to raise funds, it may decide to retain the earnings. 3. Nature of earnings A company, which has stable earnings, can afford to have a higher divided payout ratio 4. Desire to retain the escort of management Additional public issue of share will diluted the control of management. 5. Liquidity position Payment of dividend allows in cash outflow. A company may have adequate earning but it may not have sufficient funds to pay dividends. Apprising Dividend Policy of PRAN Year NI EPS Dividend Per Dividend Payout Ratio (in Millions) Share 2000 33. 76 42. 20% 20. 00% 47. 39% 2001 41. 99 52. 49% 20. 00% 38. 10% 2002 43. 41 54. 26% 25. 00% 46. 07% 2003 44. 39 55. 49% 24. 00% 43. 25% 2004 40. 31 50. 39% 24. 00% 47. 3% 2005 40. 77 50. 96% 26. 00% 51. 02% 2006 28. 95 36. 19% 26. 00% 71. 84% 2007 29. 33 36. 66% 26. 00% 70. 92% 2008 35. 95 44. 94% 28. 00% 62. 31% 2009 39. 97 49. 96% 29. 00% 58. 05% Table 1 From the table 1 we see that in 2000 and 2001 PRAN have paid a cash dividend of BDT 20 per share in 2000 and 2001 in 2002 the dividend payment was BDT 25 per share.In 2003 to 2004 and 2005 to 2007 they have paid a cash dividend of BDT 24 and BDT 26 per share respectively. In the year 2008 and 2009 the cash dividend per share was BDT 28 and 29 respectively. Here we see that the dividend has increased in start two year, although the salary Income of the company decreased. However the EPS has also increased during the detain two years and the same pattern can be seen in the Market harm of the share. pic Figure 1 From figure 1 we can say that the dividend payment of the PRAN is certain and stable, regardless with earnings.As we see that despite of a drop in the earning in the year 2006 and 2007 the company maintain a constant cash dividend payment which is BDT 26 per Share and when the earnings increased in the year 2008 and 2009 the Dividend payment also increased. pic Figure 2 The Dividend payout ratio indicates the percentage of each unit earned that a firm distributes to the owners in form of cash Dividend Payout Ratio = Dividend Per Share Earnings Per Share If we look at the figure 2 we see that to maintain a dish dividend payment per share each year they had to make a huge payment out of the Net Income. In 2006 and 2007 the dividend payout ratio was preceding(prenominal) 70% and in 2008 and 2009 it was above 58%. According to the Regular Dividend Policy the payment of the dividend is a fixed amount in each period. The Regular Dividend Policy also tries to establish to pay out a certain percentage of earnings, in time it tries to stabilize the dividend by pay out a certain amount of dividend and it adjusts the dividend towards the target payout as instaln earnings increases.In concise we can say that PRAN is following the Regular Dividend Policy Constrains of Regular Dividend Policy If we have a look at the figure 1 we see that the earnings of PRAN fluctuates year to year for this Regular dividend policy m ay sometimes prove dangerous. Once a company adopts the regular dividend policy, any adverse change in the dividend payment may gist in serious defile regarding the financial standing of the company in the mind of the investors. The same problem is been experienced by PRAN despite of a drop in the earnings that they had to maintain the same amount of dividend.Appropriate type of Dividend Policy A Stock market tends to be very efficient in the allocation of capital to its highest-value users. That market also helps increase savings and investment, which are essential for economic development. An equity market, by allowing diversification across a variety of assets, helps reduce the risk the investors essential bear, thus reducing the cost of capital, which in turn spurs investment and economic growth. However, volatility and market efficiency are two important features which will ultimately determine the powerfulness of the stock market in economic development.In contrast to that the stock market of Bangladesh which is informationally inefficient, investors face hassle in choosing the optimum investment as information on integrated performance is slow or less available. The resulting uncertainty induce investors either to withdraw from the market until this uncertainty is resolved or discourage them to invest funds for long term. Moreover, most of the time it is seen that investors are not rewarded for taking on higher risk by investing in the stock market, or excess volatility weakens investors confidence as a result they people avoid investing their savings in the stock market.Due to the imperfect market and the uncertainty of return the investors always aim for short term investment as a result they prefer dividend rather maximizing the firms wealth. The regular dividend policy, which ensures a fixed amount of dividend to be paid to the investor regardless to the companys income during the period, helps to reduce the falteringly for the investors. For this the Regular Dividend Policy is the appropriate for PRAN. Year Net Asset Value Per EPS Dividend Per Share Bonus Share Market Price Per Share Share 2000 258. 39 42. 20% 20. 00% - 416. 50 2001 284. 60 52. 49% 20. 00% - 370. 00 2002 312. 82 54. 26% 25. 00% - 366. 00 2003 343. 9 55. 49% 24. 00% - 412. 00 2004 362. 27 50. 39% 24. 00% - 523. 50 2005 386. 55 50. 96% 26. 00% - 519. 25 2006 396. 11 36. 19% 26. 00% - 386. 00 2007 383. 91 36. 66% 26. 00% - 382. 63 2008 428. 9 44. 94% 28. 00% - 1142. 00 2009 449. 96 49. 96% 29. 00% - 1363. 00 Net Asset Per Share Vs. Market Value Per Share Table 2 From the table 2 we can say that PRAN has never issued any Bonus shares from 2000 to 2009. However they have maintained a steady dividend payment that shows a positive slope. The market price is very fluctuating in 2005 the MV was 519. 25 but in 2006 it went down to 386. 00, in 2007 it was 382. 63 but in 2008 the MV was 1142. 00. picFigure 2 From the figure 2 we see that till 2007 t he Share Market Price and the Net Asset Value Per share is very close heretofore from 2008 the difference between the Market Price and Net Asset value per Share increased despite of a drop in the Net Income. In the year 2008 and 2009 the corporation has paid a cash dividend of BDT 28 and 29 per share respectively and the EPS in 2008 was 44. 94% and in 2009 was 49. 96. From the above mentioned information we can say that there is a high possible action that the reason behind the increase in the market price of the share imperfect market condition in the Capital Market in Bangladesh.The imperfect market situation might be the result of Syndication or by spreading rumor in the market, which caused the Share Price of PRAN to go up. Capital Structure In finance, capital structure refers to the way a corporation finances its assets through some combination of equity, debt, or crossbreeding securities. In other words we can say that Capital Structure is the mix of a companys long-term d ebt, specific short-term debt, common equity and preferred equity. The capital structure is how a firm finances its general operations and growth by using different sources of funds.Debt comes in the form of bond issues or long-term notes payable, while equity is classified as common stock, preferred stock or retained earnings. Short-term debt such as working capital requirements is also considered to be part of the capital structure. For example, a firm that sells BDT 20 billion in equity and BDT 80 billion in debt is said to be 20% equity-financed and 80% debt-financed. The firms ratio of debt to total financing, 80% in this example is referred to as the firms leverage. In reality, capital structure may be highly complex and accept scores of sources.Gearing Ratio is the proportion of the capital employed of the firm which come from foreign of the business finance, e. g. by taking a short term loanword etc. A companys proportion of short and long-term debt is considered when an alyzing capital structure. When people refer to capital structure they are most likely referring to a firms debt-to-equity ratio, which provides insight into how risky a company is. Usually a company more heavily financed by debt poses greater risk, as this firm is comparatively highly levered.The Modigliani-Miller theorem, proposed by Franco Modigliani and Merton Miller, forms the basis for modern thinking on capital structure, though it is generally viewed as a purely theoretical result since it assumes away many important factors in the capital structure decision. The theorem states that, in a perfect market, how a firm is financed is irrelevant to its value. This result provides the base with which to examine real world reasons why capital structure is relevant, that is, a companys value is affected by the capital structure it employs.Some other reasons include bankruptcy costs, way of life costs, taxes, and information asymmetry. This analysis can then be extended to look at w hether there is in fact an optimal capital structure the one which maximizes the value of the firm. Capital structure in the real world if capital structure is irrelevant in a perfect market, then imperfections which exist in the real world must be the cause of its relevance. The theories below try to address some of these imperfections, by relaxing assumptions made in the M model.Capital Structure Theory tradeoff theory of capital structure Trade-off theory allows the bankruptcy cost to exist. It states that there is an advantage to financing with debt (namely, the tax benefit of debts) and that there is a cost of financing with debt (the bankruptcy costs of debt). The marginal benefit of provided increases in debt declines as debt increases, while the marginal cost increases, so that a firm that is optimizing its overall value will focus on this trade-off when choosing how much debt and equity to use for financing.Empirically, this theory may explain differences in D/E ratios be tween industries, but it doesnt explain differences within the same industry. Pecking order theory Pecking Order theory tries to capture the costs of unsymmetrical information. It states that companies prioritize their sources of financing (from intrinsic financing to equity) according to the law of least(prenominal) effort, or of least resistance, preferring to raise equity as a financing means of last resort.Hence internal debt is used first when that is depleted, then debt is issued and when it is no longer sensible to issue any more debt, equity is issued. This theory maintains that businesses adhere to a hierarchy of financing sources and prefer internal financing when available, and debt is preferred over equity if away financing is required (equity would mean issuing shares which meant bringing external ownership into the company. Thus, the form of debt a firm chooses can act as a signal of its need for external finance.The pecking order theory is popularized by Myers (19 84)1 when he argues that equity is a less preferred means to raise capital because when managers (who are assumed to know better about true condition of the firm than investors) issue new equity, investors believe that managers think that the firm is overvalued and managers are taking advantage of this over-valuation. As a result, investors will place a lower value to the new equity issuance.. Agency Costs There are three types of authorization costs which can help explain the relevance of capital structure.Asset transposition effect As D/E increases, management has an increased incentive to undertake risky (even negative NPV) projects. This is because if the project is successful, share holders get all the upside, whereas if it is unsuccessful, debt holders get all the downside. If the projects are undertaken, there is a chance of firm value decreasing and a wealth transfer from debt holders to share holders. Underinvestment problem If debt is risky (e. g. , in a growth company) , the gain from the project will accrue to debt holders rather than shareholders.Thus, management has an incentive to reject positive NPV projects, even though they have the potential to increase firm value. Free cash flow unless free cash flow is given back to investors, management has an incentive to destroy firm value through empire twist and perks etc. Increasing leverage imposes financial discipline on management. Other The neutral mutation hypothesisfirms fall into various habits of financing, which do not impact on value. Market timing hypothesiscapital structure is the outcome of the historical cumulative timing of the market by managers.Accelerated investment effecteven in absence of agency costs, levered firms use to invest faster because of the existence of default risk. Primary Factors influencing the Capital Structure 1. product line Risk It is the risk associated with the unique circumstances of a particular company, as they might affect the price of that companys se curities. If the business risk is higher than the optimal debt amount will be lower. 2. Tax Position It is the second signalize factor.The major reason for using debt is that the interest is tax deductable which helps to lower the effective cost of debt. However, if much of a firms income is already furnish from taxes by accelerated depreciation or tax loss carried forward from previous years, its rate will be low, as a result debt will not be advantageous as it would be to a firm with higher effective tax rate. 3. Financial Flexibility It indicates a firms ability raise capital on honest terms under adverse conditions. 4. Managerial Attitude It is the firms attitude to borrowing fund.Some of the firms are more aggressive than others hence, some firms are more inclined to use debt in an effort to boost profit. This factor does not affect the optimal capital structure or value-maximizing, however it does influence the firms target capital structure. Evaluating the Capital Structur e of PRAN The debt-to-equity ratio (D/E) is a financial ratio indicating the relative proportion of shareholders equity and debt used to finance a companys assets. Closely related to leveraging, the ratio is also known as Risk, Gearing or Leverage. Year impartiality Debt Debt to Equity RatioNI EPS (in Millions) 2005 330. 04 165. 94 33. 46% 40. 77 50. 96% 2006 337. 69 152. 59 31. 12% 28. 95 36. 19% 2007 327. 93 114. 00 25. 80% 29. 33 36. 66% 2008 342. 71 92. 9 21. 25% 35. 95 44. 94% 2009 359. 97 138. 99 27. 86% 39. 97 49. 96% Table 3 From the table 3 we can say that that in 2005 when the D/E ratio was 50. 96% the company experienced the highest EPS. If we compare the D/E ratio and the EPS of 2008 and 2009 we see that in 2009 the debt ratio has increased by 6. 61% which had a positive effect on the EPS as a result the EPS increased by 5. 02%. It shows that when the D/E ration increases the EPS also increases.If we look at the graphical presentation it will be easier for u s to understand which is given below. pic Figure 4 If we take the average of the D/E ratio from 2005 to 2009 we see that on average PRAN is maintaining a D/E ratio of 27. 90%. In short we can say that 27. 90% of the total equity is financed by Debt. It means that the PRAN is moderately aggressive towards the debt financing. As a result they have a lower Financial Risk and higher Business risk. Conclusion PRAN is one of the reputed companies in the Dhaka Stock veer and they fall under the Category A.From year 2000 to 2009 PRAN has always have paid cash dividend however they have never paid stock dividend. PRAN is maintaining a reserve capacity Dividends can be used to excite assets out of the company and consequently from the potential allege of creditors which can be injurious to creditor wealth, and creditors will beyond a shadow of a query take pricing or contractual actions to offset these latent uses of dividends. The contemplations of signaling, agency and the effects of mar ket imperfections upon optimal dividends are imperative dimensions about which financial managers must be sentient. RecommendationsCash and stock dividend, both should be paid without fail. Our stock market is not an efficient market. The available information most of the times do not lead to the desired reality. Many investors believe on the rumors and invest in the share market. Security Exchange explosive charge should take proper steps to minimize this condition. Disclosure of the overall market price in the annual report is desirable. The company can ideas from its investors to break the situation and thereby engaging them in the part of the decision making process. Issuing of bonus shares can be a good option to attract the potential investors.