TABLE OF CONTENTS

INTRODUCTION ......................................................................................................... 1
1.1 Background .......................................................................................................... 1
1.2 Profile of Sanima Mai Hydropower Limited ....................................................... 2
1.3 Statement of the Problems.................................................................................... 3
1.4 Objectives of the Study ........................................................................................ 4
1.5 Rationale of the Study .......................................................................................... 5
1.6 Literature Review ................................................................................................. 6
1.6.1 Conceptual Review ........................................................................................ 6
1.6.2 Review of Previous Study ............................................................................. 8
1.7 Research methods ................................................................................................. 8
1.7.1 Research Design ............................................................................................ 9
1.7.2 Population and Sample .................................................................................. 9
1.7.3 Data Analysis Tools ....................................................................................... 9
1.8 Limitation ........................................................................................................... 11
BIBLIOGRAPHY ........................................................................................................ 12
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INTRODUCTION
1.1 Background

The term dividend refers to a company’s payment to its shareholders when it earns
profit. In simple language, when a shareholder purchases a share in a company, they
can get a percentage of the company’s profit depending on the number of shares
they bought, which is called a dividend. It is important to note that a shareholder
can earn a return either by cash dividend, stock dividend, or a combination of both.

Companies are established to generate profit. Firms face two unavoidable situations
when carrying out business activities: either suffer from loss or earn profit. In case
the firm earns profit, the management of the firm has to make one out of three
alternative decisions: it can distribute all of its earnings in the form of cash
dividends, or it can retain all of its earnings for reinvestment, or it can distribute a
part of earnings as a dividend and retain the rest for reinvestment purpose (Paudel,
Baral, Joshi, Gautam, & Rana, 2023). When a company distributes certain profits
among its shareholders, it is called dividends. It is one of the major reasons behind
the public’s interest in investing in any company. Giving dividends is like thanking
shareholders for their ongoing support through returns. It also incentivizes the
shareholders to continue holding the stocks in the company.

Generally, the Board of Directors of a company determines and approves the time
and frequency of dividend payments. The amount paid or stock given to
shareholders is equal in all cases, which means common and preferred shareholders
get the same amount of money or the same number of stocks as dividends. A
growing or newly established company pays low or no dividends, while a mature
company pays a high or increasing dividend.

Management must decide how much money should be considered retained earnings
before paying out profit to its shareholders as dividends. Thus, deciding how much
to give as a dividend to its shareholders and how much to retain in the company is
known as a dividend decision. The firm's decision about the dividend size for its
shareholders is called dividend policy.
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Determining dividend policy involves addressing two key questions: (a) What
proportion of earnings should, on average, be allocated for distribution over time?
(b) What kind of dividend strategy should the corporation adopt? This includes
decisions such as whether to maintain a stable dividend policy or to implement a
policy aimed at increasing the growth rate of dividends, among other factors.

Any change in the dividend size can bring favorable and unfavorable effects on the
firm’s stock price. A reciprocal relationship exists between retained changes and
cash dividends (Jonchhe, 2011). If the company keeps retained earnings more, less
will be dividends, and vice versa. If a firm pays a higher dividend, its shareholders
will receive higher cashflows immediately. However, it lowers the future growth
rate of the firm because the firm will not have the required funds for expansion or
reinvestment. However, if the firm pays a lower dividend, it will have enough
retained money for expansion or reinvestment. However, its shareholders can
withdraw support under such circumstances. Dividend payout ratios are lower in
firms with controlling shareholders (Lacave & Urtiaga, 2014). Firms with higher
market-to-book value tend to have good investment opportunities and would,
therefore, pay lower dividends (Jonchhe, 2011). Therefore, the dividend policy
should be optimal. The main target should be maximizing the firm's stock price or
the shareholders' wealth.

A dividend decision is key because it affects the value of the company’s share in the
marketplace. Therefore, the firm should create and implement an effective dividend
policy that maximizes stockholders’ wealth. Dividend is both a critical and complex
concept. There is also an ongoing debate about whether a company is obligated to
pay profit out to its shareholders as dividends or it should retain profit for utilizing
in the firm’s growth.

1.2 Profile of Sanima Mai Hydropower Limited

Sanima Mai Hydropower Limited is one of the hydropower companies of our

country Nepal. It generates and sells hydroelectricity to the Nepal Electricity
Authority. The Company is mainly owned by Non-Resident Nepali.
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Sanima Mai Hydropower Limited (SMHL) was established under Company Act,
2063 in 2008/09/11 A.D. as a “Mai Hydropower Private Limited”. Then in
2012/03/16 A.D., according to company Act, 2063 sub (1) (Ka) converted into
Public limited. The company only in the later days of establishment renamed itself
to the current name of “Sanima Mai Hydropower Limited”.

The company own two hydropower projects, viz, Mai Hydropower Plant and Mai
Cascade Hydropower Plant. The maximum revenue generating plant is the Mai
Hydropower Plant as it generates 22 MW of power while Mai Cascade Hydropower
generates only 7 MW (n.a., 2013). The aggregate capacity is 29 MW.

The primary office of the company is located Narayanchour, Naxal of Kathmandu.

Danabari and Chisapani Village Development Committee is the location of Mai
Hydropower while Danabari Village Development Committee is the location of Mai
Cascade Hydropower. The source of power is Mai Khola of Illam, Nepal.

Sanima Mai Hydropower Limited (SMHL) is public limited company which was
established as special purpose vehicle company in 2065.Sanima Mai Hydropower
Limited was converted to public limited company is coded as SHPC in Nepal Stock
Exchange. SMHL is considered as one of the best hydropower companies of Nepal
and has its investment in different hydropower project being developed by Sanima
Hydro group. The average annual energy generation of Mai Cascade Hydropower
plant is 38.422 GWh.

1.3 Statement of the Problem

Dividend decision is a crucial and controversial function of management. Many

studies have assessed the relationship between a firm's dividend policy and market
value. However, there is a lack of consensus regarding the relationship. For
example, Black has pointed out, “The more we look out the dividend picture, the
more it seems like a puzzle.” Also, controversy regarding relationships has been
around for a long time. Therefore, it is safe to say corporate dividend policy is not
as clear as a crystal to a large segment of the financial community.

Corporate development comes by way of the capital market. The Nepalese capital
market is in a nascent phase. However, Nepalese investors have generously supplied
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money to newly established companies. Investors have poured lavish funds into
hydropower companies. Several government initiatives and programs bolster this
trend. For example, the then PM KP Oli launched ‘Nepal Ko Pani, Janata Ko
Lagani, Harek Nepali Jala Bidyutko Share Ko Dhani.’ This program and several
other benefits, like tax exemptions, have encouraged construction and operation and
indigenous funding in hydropower projects. Giving ample returns on their
investment is one of the prime functions of any corporation towards its investors.
Giving a dividend is more significant than promising to give the dividend. Solomon
(1963) has said dividends may offer tangible evidence of a firm’s generating ability,
and the dividend policy affects the share price.

A study conducted in a small market such as Nepal primarily found that stocks with
greater dividend yields exhibit increased liquidity, reduced debt utilization, elevated
earnings, heightened trading activity, and improved ability to cover interest
expense. This study is proposed to verify this result and make the management
understand how dividend policy affects the firm's market value or market price of
the stock or the wealth position of the shareholders. It also seeks to answer the
following questions:

• What are the current practices of dividend policy in the Sanima Mai
Hydropower Limited?
• What is the price movement pattern of Sanima Mai Hydropower Limited after
dividend declaration?
• What relationship exists between EPS, DPS, MPS, DPR, and dividends over
the last five years in Sanima Mai Hydropower Limited?

1.4 Objectives of the Study

The main purpose of this study is to overview the dividend-related aspects of

Sanima Mai Hydropower Limited. This report analyses the pattern of dividend-
related financial indicators and provides insights into the financial health of
Sanima Mai Hydropower Limited.

The overall objectives of this study are as follows:

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• To investigate the practice of dividend policy in Sanima Mai Hydropower

Limited
• To examine the movement of the share price of Sanima Mai Hydropower
Limited after the declaration of dividend
• To study the relationship between EPS, DPS, MPS, and dividends.

1.5 Rationale of the Study

In financial management, four primary activities are involved in the decision-

making process. These activities encompass financing decisions, investment
decisions, allocation decisions, and decisions regarding the distribution of profits.
Specifically, dividend distribution decisions are actions related to the distribution
of profits to provide a return on earnings to its initial investors, namely,
shareholders.

When a firm engages in its financial accounting and reporting for a specific fiscal
year, it undergoes a process to calculate its profit. This process involves several
steps, one of which is deducting expenses and interest on debentures from the
revenue generated during that financial year. This profit is called profit before tax.
The firm pays tax on such an amount. The final amount in the hand of the firm after
paying tax dues is called residual balance. Logically, this money belongs to the
investors or shareholders and should be distributed among them. However, it does
not always happen. The amount from the residual balance paid to an investor is the
dividend. This dividend has been a controversial topic from the viewpoint of the
management.

The dividend strategy serves as an efficient means to draw in fresh investors,

preserve the loyalty of current shareholders, ensure their satisfaction, and uphold
the company's reputation while maintaining the desired level of influence in the
firm's management. Additionally, shareholders often expect a consistent stream of
dividends, and any change in dividend policy, whether an increase or decrease, can
lead to dissatisfaction among investors. Furthermore, paying dividends requires a
company to have sufficient cash flow and profits. During tough economic times or
when a company needs funds for growth or debt repayment, paying dividends might
strain its financial health. Some argue that companies should invest excess cash into
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research, development, or acquisitions instead of paying dividends, which may lead

to higher long-term growth but can be at odds with short-term shareholder interests.

This study will provide vital information about the possible impact of dividends on
the market price of the share. It will also be instrumental in helping management
and policymakers set and implement suitable dividend policies. Scholars,
hydropower developers, and interested groups can use the findings to increase their
knowledge about dividend and its relationship with the market price. In a country
lacking financial knowledge, the findings can assist people in investing informedly
in the stocks of good corporations. However, there is always room for new research
and innovation, as this study still needs to be completed.

1.6 Literature Review

Dividend policy is one of the most important policies in the study of financial
management (Akbaba & Altintas, 2020). However, it has not yet reached a state of
unanimity among researchers, scholars, and managers. Several theoretical and
empirical researches have been done to examine issues in the dividend policy as a
proper understanding of dividend policy is crucial for other areas of corporate
finance such as capital structure, theories of asset pricing, mergers and
acquisitions, and capital budgeting since they rely on how and why dividends are
paid (Sang, Shisia, Gesimba, & Kilonzo, 2015).

The Nepal Company Act 1997 includes provisions regulating bonus shares, the
prohibition of share repurchases, and rules for dividend distribution. Section 2 (m)
defines bonus shares (stock dividends) as additional shares issued to shareholders
by capitalizing a company's surplus profits or reserve funds. Section 47 prohibits
companies from purchasing their shares or providing loans against the security of
their shares.

1.6.1 Conceptual Review

The research around dividend policy surfaced in 1956 from an English University
(Baker, Singleton, & Veit, 2010). Dividend policy refers to the payout policy that
management follows while determining the size and pattern of distribution to
shareholders over time. The choice of dividend policy plays a crucial role in
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determining how much a company relies on its internal funds (Brigham & Weston,
1981). The finance manager is responsible for deciding on the distribution of
corporate earnings and whether they should remain within the company's control.
Since dividend policy can have significant implications for various aspects,
including the company's financial structure, available cash flow, liquidity, stock
prices, and investor satisfaction, it unquestionably holds a significant place in
financial management.

One of the arguments centered around dividend policy is whether or not to give
dividends to the shareholders. At the same time, others believe dividends are good
for corporations and shareholders. Using a familiar economic model, it became
apparent that dividends are not a market right or a moral entitlement (Greenwood,
2006).

The dividend irrelevance theory suggests that a firm's choice of dividend payments
does not impact its overall value or stock price (Modigliani & Miller, 1961).
According to this theory, investors are indifferent to whether they receive
dividends or capital gains since they can replicate dividend payments by selling a
portion of their shares if needed.

Cash dividend refers to the portion of earnings paid as cash to the investors in
proportion to their company shares (Pandey, 2015). When a cash dividend is
distributed, it typically results in a decrease in the company's assets and overall
value, which often leads to a corresponding drop in the market price of the
company's shares (Jonchhe, 2011).

A stock dividend is a payment in the form of additional shares of stock instead of

cash. A stock split is essentially the same (Pandey, 2015). When a stock splits,
shareholders are given more shares for the old shares they already own. In either
case, each shareholder retains the same percentage of all outstanding stock that he
or she had before the stock dividends or split (Jonchhe, 2011).

Corporate share repurchase is often viewed as an alternative to paying dividends.

If a firm has some surplus cash (or it can borrow), it may buy back some of its
stock (Khan & Jain, 2017).
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1.6.2 Review of Previous Study

The corporate sector of Nepal is in a nascent phase. Research activities are few in
the context of Nepal regarding the corporate sector. Besides, the construction and
operation of hydropower by the private sector started around the 1990s while the
first hydropower was commissioned in 1911 during the Rana regime by Rana
Prime Minister Chandra Shamsher (Adhikari, 2021).

Pradhan (2003) studied the Nepalese stock market, where he analyzed data from
29 companies from 1994 to 1999, totaling 93 observations. He aimed to assess the
significance of dividends and retained earnings in influencing the market price of
shares. His research revealed that dividend payments were more important than
retained earnings in Nepal. Utilizing regression models, such as linear or log, his
findings highlighted that dividend payments had a notable impact on the valuation
of shares.

Sharma (2002) conducted a study on dividend policies in four insurance companies

in Nepal using data from 1998/99. The study aimed to assess the impact of
dividends on stock market prices, differences among Dividend per Share (DPS),
Earnings per Share (EPS), and Dividend Payout Ratio (DPR), and the relationship
between market share value and various financial indicators. The findings revealed
that NLGICO and NICO had satisfactory DPS and EPS compared to PICO and
UICO, with greater fluctuations in PICO and UICO's dividend yield due to their
newer dividend distribution practices.

1.7 Research methods

Various tools are used to accomplish the objectives set in this study. The first step
is to identify a reliable, accurate data source. Here, the annual report of the Sanima
Mai Hydropower Limited is the data source of the study. Then the data are analyzed
using financial formula and presented in relevant graphs and charts. The graphs
and charts are studied to provide meaningful conclusion and insightful
recommendations. Financial and statistical tools will be used to analyze the
collected data. Microsoft Word and Excel will be used for editing, coding,
classifying, and tabulating the data.
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1.7.1 Research Design

Quantitative design shall be used extensively in this paper. In order to carry out
financial and statistical analysis to calculate financial ratios related to dividends,
various sorts of numerical data are needed. Data like numerical values of assets,
inventories, and so on are needed to calculate dividends. The annual report of
Sanima Mai Hydropower Limited for the past five years is taken for study
purposes. The research is designed to investigate the dividend policy of Sanima
Mai Hydropower Limited.

The qualitative design has no implication here because the scope of the paper does
not need to gain insight into and understanding of shareholders’ perception after
receiving and not receiving dividends from Sanima Mai Hydropower Limited. The
objectives have no desire to do so.

1.7.2 Population and Sample

Due to time constraints, research cannot be conducted in the entire population of

data. Rather, the paper will strictly use secondary data provided in Sanima Mai
Hydropower Limited's annual report in the past five years. The use of primary data
is out of the question because the scope of the paper does not allow for the
collection of such humongous, equally confidential data.

Secondary, processed, and verified data are freely available in the public domain.

1.7.3 Data Analysis Tools

Based on the past five-year annual report, financial tools and techniques are used
to calculate the EPS, DPS, DPR, Dividend yield, and MPPS of Sanima Mai
Hydropower Limited.

Earnings per Share (EPS)

EPS is the net income per share available to the common stockholders after paying
preferred dividends. It is the most important ingredient for determining MPPS. The
high value of EPS results in a higher market price.in this study, it is denoted by
EPS.
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Total Earning of Company

EPS =
No. of common share outstanding

Dividend Per Share (DPS)

DPS is that portion of EPS distributed to the shareholders but varied according to
the company’s policy. It is another factor affecting MPS.

Total dividend paid

𝐷PS =
No. Of common shares outstanding

Dividend pay-out Ratio

This ratio shows what percentage of the profit is distributed as dividends and what
percentage is retained as reserve and surplus for the growth of the hydropower.

DPS
DPR =
EPS

Dividend Yield (DY)

The dividend yield is a percentage of dividends per share on market price per share.
It shows how much the dividend per share is on market price per share. It measures
the dividend about the market value of the share.

DPS
DY =
MPS

Market Price Per Share (MPPS)

MPPS is the value of a share in the market. It is the amount investors are willing
to pay for one share of the company’s stock. MPPS of each sample denotes the
monthly and yearly-ended value and has been brought here from the annual report
and is denoted by MPS. It is the output of the interacting forces of demand and
supply at a given time concerning price and volume.
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Total markets capitalization

MPS=
No. of common shares outstanding

1.8 Limitation

Every study has its own limitations, and the following are the limitations of the
study:
• This study is mainly conducted on the secondary data, so the result depends on
the reliability of the secondary data.
• Many factors affect the firm's dividend decision and valuation. However, only
those dividend-related factors will be considered in this field.
• The study of research covers only five years of data.
• This report is only for academic purposes.
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