ReportonDividend Appraisal of Brac Bank Limited

FIN-507 Corporate Finance

Submitted toDr.Tanbir Ahmed ChowdhuryChairperson & ProfessorDepartment of Business AdministrationEast West University

Submitted byNameID

Md.Saidur Rahman Shoyeb2013-1-95-093

Niaj Mahmud2013-1-95-055

Mahmudul Hasan2012-3-95-071

Shibrul Hasan2012-3-95-124

Jonayed-Bin-Zahir2012-3-95-095

Maeedah Haque Mitu2012-2-95-021

Date of Submission: December 6, 2013

LETTER OF TRANSMITTALDecember 6, 2013

Dr.Tanbir Ahmed Chowdhury Chairperson & ProfessorDepartment of Business Administration East West University

Subject: Submission of report on Dividend Appraisal of Brac Bank Limited

Sir,Here is the report that is assigned us to be prepared under the guidance of you, for the course of Corporate Finance. We, the members of group are pleased by submitting our assigned report on Dividend Appraisal of Brac Bank Limited to you, which emphases our knowledge and the economical impact. We have tried to enclose all the needful areas of discussion.

With due respect and humble submission, we would like to request you to examine and evaluate the report at your convenience and thereby.

Thank you.Md. Saidur Rahman Shoyeb_______________________________

Niaj Mahmud_______________________________

Mahmudul Hasan_______________________________

Shibrul Hasan_______________________________

Jonayed-Bin-Zahir _______________________________

Maeedah Haque Mitu_______________________________

Yours truly

ACKNOWLEDGEMENT

At first, we are grateful to Almighty Allah for giving us the opportunity to carry out this report work. The more we learn, the more we are able to gather knowledge. On the completion of our report on Dividend Appraisal of Brac Bank Limited we thank Allah for bestowing us with Allah blessing and enabling us to complete our assigned task without much encumbrance.

We are absolutely grateful to our indebtedness to most honorable our course teacher, Dr.Tanbir Ahmed Chowdhury who has provided us such opportunity with support, encouragement & constructive criticisms.

Finally we are grateful to our beloved parents and family members for their inspiration and good wishes extend to us during the course of this study.

The Authors

ABSTRACT

This study has been carried out to evaluate the relationship between market performance and dividend policy of Brac Bank. Attempts are made to examine what kind of relationship exists between dividend policy and stock returns of Brac bank, and to what degree the returns on stocks can be explained by their respective dividend policy for the same period of time. Dividend policy may affect the shareholders satisfaction, financial structure, flow of fund and share price. We try to illustrate the relation between dividend policy and share price by analyzing earning per share, net income, return on equity, return on assets, and dividend payout ratio and stock dividend for empirical analysis of dividend distribution Brac Bank. After analyzing all the data we came into a decision that company follow any specific dividendpolicyandbiasedtoDividendRelevanceTheory. iii

Table of Content

ParticularsPage no.

Letter of Transmittali

Acknowledgementii

Abstractiii

Introduction01

Objective of the Study01

Methodology of the Study01

Limitation02

An Overview of Brac Bank 03-04

Dividend Irrelevance Theory 05

Dividend Relevance Theory06

Some Performance Indicators Earnings per Share Profit after Tax Return on Assets (ROA) & Return on Equity ( ROE) Shareholders Equity

07-09

Information regarding Dividend Brac Bank Cash Dividend: Stock Dividend Relation between Dividend Rate and Market Price of Stock Dividend Payout Ratio Dividend payout & Retention ratio: Net Assets value per Share

10-12

DIVIDEND POLICIES Constant- Pay-out ratio Regular Dividend Policy Low-Regular-And- Extra Dividend Policy

13

Findings & Recommendations

14

Reference 15

List of Table

TablePage No

TablePage No

Table 1: Cash Dividend declared by Brac Bank in the last 5 years10

Table 2: Stock Dividend declared by Brac Bank Limited in the last 5 years10

Table 3: Relationship between Dividend and Share Price11

Table 4: Dividend Payout ratio of Brac Bank Limited for last 5 years11

Table 5: Dividend Payout and Retention ratio of Brac Bank Limited for last 5 years12

Table 6: Percentage of cash, stock and total dividend in the last 5 years14

List of Figure

FigurePage No

Figure1: Earnings per Share

07

Figure 2: Profit after Tax

07

Figure 3: Return on Assets

08

Figure 4: Return on Equity

08

Figure 5: Shareholders Equity

09

Figure 6: : Relationship between Dividend and Share Price

11

Figure 7: Net Assets value per Share

12

Introduction Dividend is that portion of net profits which is distributed among the shareholders. The dividend decision of the firm is of crucial importance for the finance manager since it determines the amount to be distributed among shareholders and the amount of profit to be retained in the business. Retained earnings are very important for the growth of the firm. Shareholders may also expect the company to pay more dividends. So both the growth of company and higher dividend distribution are in conflict. So the dividend decision has to be taken in the light of wealth maximization objective. This requires a very good balance between dividends and retention of earnings.Dividend policy is concerned with financial policies regarding paying cash dividend in the present or paying an increased dividend at a later stage. Whether to issue dividends and what amount, is determined mainly on the basis of the company's inappropriate profit (excess cash) and influenced by the company's long-term earning power. When cash surplus exists and is not needed by the firm, then management is expected to pay out some or all of those surplus earnings in the form of cash dividends or to repurchase the company's stock through a share buyback program.

OBJECTIVES OF THE STUDYThe main objectives of the study are.

To present an overview of Brac Bank Limited. To appraise the companys Dividend Policy. The main objective is to analyze the relationship between dividend policy and market price of share. METHODOLOGY OF THE STUDY

The assignment was mainly done by making some analytical approach. We have primarily used secondary data for the report. For this, we used the annual report, Dhaka Stock Exchange website and companys website. For the fulfillment of our reports purpose, we had selected Brac Bank Limiteds five year (2008-2012) annual reports. The existing guidelines, documents and other supporting papers relevant to this assignment were also consulted and examined.

LIMITATION OF THE STUDYWe try our best to make the report informative errorless and practical. However, we could not avoid some limitations, for which there might be some inaccuracy in this report. Following are the limitations It may not be possible to contact with investor to collect data or to have discussion with them about dividend policy. It will be harder to collect various data, books and journals related to the topic due to limited accessibility of resources. Many up-to-date data and documents may not be available, which could have made the study more informative. So a major constraint of the study will be the insufficient information. Confidentiality of data was another barrier that was confronted during the conduct of the study. Our experience was very poor in comparison with the scope of study. No such specific cost information Time limitation is a major issue for the study work.

An overview of Brac BankBRAC Bank is a private commercial bank focused on Small and Medium Enterprises founded on 4th July, 2001. The company consists of 155 branches, 400 SME unit offices, 675 Remittance Delivery Points, Over 320 ATMs and 14 Kiosks across the country. BRAC Bank is among the last few organizations to have received a commercial banking license from Bangladesh Bank. Its headquarter is based in the capital Dhaka.The stakeholders of the bank are BRAC, the largest non-government organization in the world, International Finance Corporation, the private sector arm of The World Bank Group and Shore Cap International.BRAC Bank practices upon a model where fund accumulated from urban deposits disseminates in the rural and uplift Small and Medium Enterprises (SME). By now it has become fourth largest SME bank globally. The company also offers Probashi banking, which specifically caters to non-resident Bangladeshis abroad. Other areas include customized treasury and foreign exchange solutions, cash management and custodial services.Share Holdings: General Public holds through Dhaka Stock Exchange the largest portion of the shares (50%), followed by BRAC (43.77%), International Finance Corporation (5.36%), Shore Cap International Ltd (0.86%) & others.Achievements and Recognitions: Best managed Bank Award 2013 from Asian Banker Retail Banker Award 2011 from Asian Banker Best Retail Banker Award 2011 from Asian Banker FT-IFC Sustainable Bank of the Year 2010 (Emerging Markets, Asia) IFC awarded BRAC Bank as the Most Active Global Trade Finance Program (GTFP) Issuing Bank in South Asia in 2010 Member of Global Alliance for Banking on Values (GABV) ICAB National Award 2009 DHLDaily Star Bangladesh Business Awards 2008 NBR National Award as the Highest VAT payer for the financial year 2007-2008Corporate VisionBuilding profitable and socially responsible financial institution focused on Market and Business with Growth potential, thereby assisting BRAC and stakeholders to build a just, enlightened, healthy democratic and poverty free Bangladesh.Corporate MissionSustained growth in Small & Medium Enterprise sector

Continuous low-cost deposit Growth with controlled growth in retail assets.

Corporate Assets to be funded through self-liability mobilization. Growth in Assets through syndications and investment in faster growing sectors.

Continuous endeavor to increase non-funded income

Keep our debt charges at 2% to maintain a steady profitable growth

Achieve efficient synergies between the banks branches, SME unit offices and BRAC field offices for delivery of remittance and Banks other products and services

Manage various lines of business in a full controlled environment with no compromise on service quality

Keep a divers, far flung team fully controlled environment with no compromise on service quality

Keep a diverse, far flung team fully motivated and driven towards materializing the banks vision into reality

Basic Information

Registered OfficeGulshan Avenue, Gulshan-1, Dhaka-1212

Inauguration of Banking operation4th July, 2001

Initial Public offering of Shares 2006

Listing with CSE24th January, 2007

Listing With DSE28th January,2007

Commencement of Share Trading in DSE & CSE31th January,2007

Authorized Capital12,000 million

Paid-up Capital4,433 million

Market Lot500

Face Value10

Market Capital14,850.703 million

Total number of Securities443,304,576

Market categoryA

Share PercentageSponsor/DirectorInstitutePublic50%5.6%44.4%

Average EPS(2008-2012)5.34

Current Price Earnings Ratio(Based on Annualized EPS of 2013)7.87

Average Bonus Issue (2008-2012)23%

Right Issue1R:5 2008

Dividend Irrelevance Theory Merton Miller and Franco Modigliani (MM) developed a theory that shows that in perfect financial markets (certainty, no taxes, no transactions costs or other market imperfections), the value of a firm is unaffected by the distribution of dividends. They argue that value is driven only by the firm's ability to earn money and riskiness of its activity can have an impact on the value of the company; the value of a firm is unaffected by how that firm is financed. It does not matter if the firm's capital is raised by issuing stock or selling debt, nor does it matter what the firm's dividend policy is. Dividend irrelevance follows from this capital structure irrelevance.Modigliani-Miller grounded their theory on a set of assumptions: No time lag and transaction costs exist. Securities can be split into any parts (i.e., they are divisible). No taxes and flotation costs. Financial leverage does not affect the cost of capital. Both managers and investors have access to the same information. Firm's cost of equity is not affected in any way by distribution of income between dividend and retained earnings. Dividend policy has no impact on firm's capital budgetUnder these frictionless perfect capital market assumptions, dividend irrelevance follows from the Modigliani-Miller theorem. Essentially, firms that pay more dividends offer less stock price appreciation that would benefit stock owners who could choose to profit from selling the stock. However, the total return from both dividends and capital gains to stockholders should be the same. If dividends are too small, a stockholder can simply choose to sell some portion of his stock. Therefore, if there are no tax advantages or disadvantages involved with these two options, stockholders would ultimately be indifferent between returns from dividends or returns from capital gains.

Dividend Relevance TheoryGordon and Lintner suggested stockholders prefer current dividends ant that a positive relationship exists between dividends and market value. Fundamental to this theory is the bird-in-the-hand argument which suggests that investors are generally risk-averse and attach less risk to current as opposed to future dividends or capital gains. Because current dividends are less risky, investors will lower their required returnthus boosting stock prices.Cash Dividend reduces investor uncertainty causing investors to discount the firms earnings at a lower rate and it places a higher value on the firms stock. If dividends are increased, investor uncertainty will decrease, lowering the required return (Ks) and increasing the value of the firms stock. If dividends are reduced or are not paid, investor uncertainty will increase, raising the required return (Ks) and lowering the value of the firms stock. Empirical studies fail to provide conclusive evidence in support of dividend relevance argument. However, financial managers & stockholders believe that dividends are relevantApproximately 90% of CFOs agree or strongly agree that they smooth dividends from year to year and try to avoid reducing dividends (Brav, Graham, Harvey, and Michaely, 2005). Dividend smoothing behavior was also recorded by other surveys (Baker and Powell, 1999; Bernheim, 1991; Lintner, 1956). According to the survey, managers believed that the market puts a premium on stability or gradual growth in rate of dividends (Lintner, 1956).

Afinancialmanagermaytreatthedividenddecisioninthefollowingtwoways:

1)As a long term financing decision: - When dividend is treated as a source of finance, the firm will pay dividend only when it does not have profitable investment opportunities. But the firmcanalsopaydividendsandraiseanequalamountbytheissueofshares.

2)As a wealth maximization decision: - Payment of current dividend has a positive impact on the share price. So to maximize the price per share, the firm must pay more and more dividends.

Some Performance Indicators1. Earnings per ShareEarnings per Share stood at BTD 1.32 as on December 31, 2012 compared to BDT 4.29 in 2011.

Figure1: Earnings per ShareInterpretation: From the above chart, we can see that the Earning per share is fluctuating each year, which is not good for both the firm and for the shareholders. It increase in 2010, but now it is decreasing.2. Profit after TaxThe highest profit earns in 2011 which is 1,702 million but it fall in 540 million at 2012.

Figure 2: Profit after Tax

Interpretation: High sale doesnt indicate high amount of profit. Growth in net income is even more important than sales because net income tells the investor how much money is left over after all of the operating costs are subtracted from sales. This bank was able to generate highest amount of profit in 2011, but it decrease in 2012.

3. Return on Assets (ROA) & Return on Equity ( ROE)Return on Assets (ROA) in 2012 stood at .35% recording a decrease from 2011(1.36%). Return on Equity (ROE) stood at 5.57% against 17.90% in the year 2011.

Figure 3: Return on Assets

Interpretation: Return on assets indicator of how profitable a company is relative to its total assets. So we can say management is failed to efficiently use its asset to generate earning. As ROA is lower in 2012, its net income is lower that effect market price of share.

Figure 4: Return on Equity

Interpretation: Return on Equity measure the amount of net income returned as a percentage of shareholders equity. Its indicate how much profit a company generates with the stockholders investment. The return on equity is also low in 2012 that is a bad indicator for company.

4. Shareholders EquityThe shareholders equity has increased by 5.7% over previous year. Paid up capital of the bank has gone up from BDT 3,212 million to BDT 3,855 million as a result of issuance of bonus shares out of retained earnings realized in 2011. The statutory reserve has also increased by BDT 398 million over previous years balance of BDT 2,536 million. In 2012, the banks subsidiaries also contributed in expanding its balance transferred from profit & loss account.

Figure 5: Shareholders Equity

Interpretation: The firm use more debt is known as leveraged firm. Using more debt rise risk as well as cost. Brac bank is using more equity capital that is a good sign for company.

Information Regarding Dividend of Brac Bank After analyzing % Dividend of the last 5 years, we have found out that Brac Bank had declared both Cash dividend and Stock dividend to its shareholders.1. Cash Dividend:Year% Dividend

20080%

20090%

201010%

20110%

20120%

Table 1: Cash Dividend declared by Brac Bank in the last 5 yearsInterpretation:From the above information we can say Brac Bank is not interested to pay cash dividend. It may be a good sign, may be company is using cash for future expansion. 2. Stock Dividend: After analysising last five year, we have found that Brac bank offered cash dividend in 2010, but data show that is offer stock dividend every year. Bank is trying to satisfy long term shareholder by declaring stock dividend. Year% Dividend

200830%

200930%

201020%

201120%

201215%

Table 2: Stock Dividend declared by Brac Bank Limited in the last 5 yearsInterpretation:From the above information, we can see that Brac Back declared at least 15% and the highest dividend was 30%. By declaring more stock dividend, company tries to increase its equity capital. By announcing stock dividend its helps bank to provide dividend without transfer of cash and also try to increase equity portion. When firm has shortage of fund or try to expend they used to declare stock dividend.

3. Relation between Dividend Rate and Market Price of Stock:From the Chart given below, we can say that market price was low in 2012 where dividend is only 15%, but in 2008,2009 and 2010 dividend payment was same but market price fluctuate. YearDividend%MarketPrice(TK)

200830%82.80

200930%68.75

201030%85.63

201120%45.70

201215%34.80

Figure 6: : Relationship between Dividend and Share Price Table 3: Relationship between Dividend and Share Price Interpretation:If we analysis the above data, we can say that Brac Bank is following Dividend Relevance Theory, as there is change in market price according to dividend declaration. But in previous years market price has changed although dividend is constant.

4. Dividend Payout Ratio:The dividend payout ratio indicates the percentage of each dollar earned that is distributed to the owners in the form of cash. The firm establishes that a certain percentage of earnings are paid to owners in each dividend period. Because dividends are considered an indicator of firms future condition, the firms stock price may thus be adversely affected.Dividend payout ratio = Cash Dividend per Share / E.P.S.

YEAR (1)CASH DIVIDEND PER SHARE (2)EPS (3)DIVIDEND PAY OUT RATIO (4)= (2)/(3)

200802.950%

200903.940%

201015.0519.80%

201104.290%

201201.320%

Table 4: Dividend Payout ratio of Brac Bank Limited for last 5 years

Interpretation: From the above table, we can see that the dividend payout ratio was 19.80% in 2010, as this company is not interested to declare any cash dividend this ratio in zero in other years. So we can say that it is giving less to the shareholder as cash payment. It could be a bad indicator for short term investors. 5. Dividend payout & Retention ratio:YearDividend payout ratioRetention ratio (1-payout ratio)

20080%100%

20090%100%

201019.80%80.2%

20110%100%

20120%100%

Table 5: Dividend Payout and Retention ratio of Brac Bank Limited for last 5 years

Interpretation:Only in 2010 dividend retention ratio was low, as company only paid dividend in this year. So we can say this company is following dividend irrelevance theory and keep more retain earning as future expansion. 6. Net Assets value per ShareNet assets value per share measure value of the investment based on its assets less its liabilities. Total Net Asset Value of Company/Number of Share Outstanding

Figure 7: Net Assets value per ShareInterpretation:The reason of fall in market price in 2012 could be decline in net asset value per share. So dividend is not only factor that affect the share price. DIVIDEND POLICIES

Constant- Pay-out ratio:The dividend payout ratio indicates the percentage of each dollar earned that is distributed to the owners in the form of cash. It is calculated by Firms cash dividend per share /Its earning per share.

With this policy, the firm establishes that a certain percentage of earnings are paid to owners in each dividend period.The problem with this policy is that if the firms earnings drop or if a loss occurs in a given period, the dividends may be low or even or zero. Because dividends are considered an indicator of firms future condition, the firms stock price may thus be adversely affected.Regular Dividend Policy:The regular dividend policy is based on the payments of a fixed amount dividend in each period. This policy provides the owners with generally positive information, thereby minimizing uncertainty. Often, firms that use this policy increase the regular dividend once a proven increase in earnings has occurred. Under this policy, dividends are never decreased.Low-Regular-And- Extra Dividend Policy:A dividend policy based on the paying a low regular dividend, supplemented by an additional dividend when earnings are higher than normal in a given period. An additional dividend optionally paid by the firm if earnings are higher than normal in a given period is called extra dividend. By establishing a low regular dividend that is paid each period, the firm gives investors the stable income necessary to build confidence in the firm. The extra dividend permits them to share in the earnings from an especially good period.

YearCash Dividend%Stock Dividend%Total Dividend%

20080%30%30%

20090%30%30%

201010%20%30%

20110%20%20%

20120%15%15%

Table 6: Percentage of cash, stock and total dividend in the last 5 yearsInterpretation:From above data we can say Brac Bank doesnt follow any specific dividend policy. It only pay cash dividend in 2010 and the shock dividend was constant from 2008 to 2010 but fluctuate after that.

FINDINGS

1. Brac Bank is following dividend relevance theory. They want to attract risk averse that see current dividends as less risky than future dividend or capital gains. 2. When Brac Bank declared the highest dividend in 2008 to 2010, the market price was in highest point. But when dividend declaration was reduced in 15% in 2012, the market also fall. So according to Myron j. Gordon and John Linter, Bird in hand argument there is a direct relationship between dividend and share price.3. Brac bank doesnt follow any specific policy for declaring dividend. Although the dividend constant from 2008 to 2010, but it fluctuate in next two year.4. Dividend is not only factor that affect the market price of share, because the dividend was same in 2008, 2009 and 2010 but price highly fluctuate.5. Brac bank only paid cash dividend in 2010, so dividend payout ratio is very low and retention ratio is very high, that is a good sign so using less debt for operation and also have a high fund for future expansion. 6. As Brac Bank is not interested in paying cash dividend, it is indicating that Brac Bank is in growth stage. It may face liquidity problem or saving cash for expansion.RECOMMENDATIONS

As Most of the investors of Bangladesh are in low and middle income group having lack of investment knowledge, Brac Bank may continue to follow Dividend Relevance Theory for good market price of the share. But at the same time the firm has to think about its future growth. Some investors prefer cash dividend, so Brac Bank should declare some cash dividend beside of stock dividend. If Brac Bank follows a specific dividend policy, that will be helpful for the investors to forecast their future earnings. Investors will able to assume their expected return on the basis of their preference (Short term or Long term).

Reference

1. http://www.dsebd.org/displayCompany.php?name=BRACBANK2. http://makemynote.weebly.com/relevance-and-irrelevance-theories-of-dividend.html3. https://www.boundless.com/finance/dividends/what-are-dividends/dividend-irrelevance-theory/4. http://www.bracbank.com/financialstatement/Annual_Report_2012.pdf5. http://www.investopedia.com/terms/d/dividendirrelevance.asp

http://softdrinks-bangladesh.blogspot.com/2012/03/pran-background-of-agricultural.htmlPRANstands forProgram forRuralAdvancementNationally. The largest fruit and vegetable processing industry in Bangladesh with countrywide distribution network AMCLsPRANis an established brand of Bangladesh with an extensive sales force all over the country.PRAN is the largest agro food processor and agro food exporter of Bangladesh. Their view is to enrich the agriculture sector. Keeping this view in mind, they look forward to create more demand for agro product made by their native farmer and they help to produce more agro products by giving proper training and financial support to poor farmers. They want to create employment by promoting contract farming and food processing. Their view is to make their product available to every nook and corner of the country so that every consumer gets the right to consume.It has a dehydration unit to dehydrate mushroom, banana, mango, papaya, beans and other fruits and vegetablesThe company itself cultivated many types of fruits and vegetables. More over extensive cultivation of gherkin, mushroom, and body corn were taken up through contract grousers. Processed gherkin and fresh vegetables were exported and mushroom and baby corn were canned and marketed locally.The company processes most of the fruits produced in Bangladesh like mango, pineapple, banana, guava, lemon, satkora, and many other types of fruits and vegetables including tomato. The plant facilities includes canning, pulping, juice making and bottling jam, jelly, pickles etc. It has also facilities for dehydration of fruits and vegetables and mineral water

16