Project on

Determinants of Dividend Policy: A Pharmaceutical & Chemical Industry

Presented to
Jannatunnesa
Senior Lecturer (finance)
East West University
Department Of Business Administration

Presented by
Mousumi Akter Mitu
ID: 2010-2-13-002

Declaration

I, Mousumi Akter Mitu era student of Business Administration Department (BBA program)
major in Finance of East West University do hereby declare that the Project Report on
Determinants of dividend policy based on pharmaceutical & chemical industry of
Bangladesh is my original work and has not been submitted by me before for any degree,
diploma, title or recognition. It is persuade under the supervision of Jannatunnesa, Senior
Lecturer, Department of Business Administration, East West University.

Certification of Supervisor

This is to certify that Mousumi Akter Mitu, student of Business Administration Department
(BBA) ID# 2010-2-13-002 under Faculty of Bachelor of Business Administration, East West
University has completed the Project Report on Determinants of dividend policy based on
pharmaceutical & chemical industry of Bangladesh as a part of requirement for obtaining
BBA degree. I have gone through the report and found in to be a well written report. I am
completed the report by myself under my supervision.
I wish her every success in her future endeavor.
Signature of the project supervisor

Letter of Transmittal
20thFebruary, 2015
Jannatunnesa
Senior Lecturer
Department of Business Administration
East West University
Subject: Submission of Project report on Determinants of dividend policy based on
pharmaceutical & chemical industry of Bangladesh.
Madam,
Here is the report on Determinants of dividend policy based on pharmaceutical &
chemical industry of Bangladesh which I have prepared as the requirement of completion
of the BBA degree and the course BUS 498, Project Work. While making the report I studied
about the profitability of Pharmaceutical & Chemicals Industry of Bangladesh. I have
come to know a lot of things about the practical scenario of the Profitability in
Pharmaceuticals & Chemicals sector. The whole experience of this report writing enabled
me to bridge the gap between classroom learning in my academic study in the
university and real life situations to a great extent. I thank you and the University for
providing me such an opportunity. The opportunity of preparing this report has increased my
knowledge about Pharmaceutical & chemical Industry and their profitability. In this regard, I
am really grateful to you.
Sincerely yours,
Thank you Madam
Yours Sincerely
Mousumi Akter Mitu
ID: 2010-2-13-002

Acknowledgement
First and foremost, I would like to express my gratitude to, Jannatunnesa, Senior Lecturer
(finance) of the Department of Business Administration, East West University for providing
me such an opportunity to construct project on Determinants of dividend policy based on
pharmaceutical & chemical industry of Bangladesh ". Without her helpful guidance, the
completion of this report was unthinkable. Her constant guidance and advice played the vital
role in making this report successful. She always gave me her suggestions that were crucial in
making this report as flawless as possible.
I would like to express my gratitude to all of the respected teachers of the Department of
Business Administration, East West University for their continuous support and advice during
my study period.
I want to thank the librarians of Dhaka Stock Exchange for giving their support and help us to
find information about DSE from 2004 to 2013.
In addition, I want to acknowledge the time and support extended by the other people by
providing me the information to prepare the report.
I must not forget to express my gratitude to my well wishers and friends for their moral
support and encouragement.
Finally, I thank the Almighty for always being on my side and giving me proper direction and
also for granting me my beloved parents. It is their encouragement and support from the very
beginning of my life that make possible for me to come to this stage

Executive Summary

The term paper is to highlights on different financial activities of the company

such as financial performance analysis & security of analysis of pharmaceutical
industries. The report helps to know the overall financial activities & performance of Beximco
pharmaceutical. In course of study of the firms financial statement analysis & its security
position in both local & foreign stock provides opportunity to have extensive knowledge
about details of pharmaceutical industries financial operation. It also enhance our
understanding ability regarding key financial &operation data, marketing
strategies of different production, quality control & industry analysis. With world
class range & superior quality of pharmaceutical industry will be the leading medicine manufacturing
brand in Bangladesh

Table of contents

Introduction
This research paper is based upon the performance evaluation of Pharmaceutical & Chemical
industry. A scenario of determinants of dividend policy condition has been shown in this
paper.
Origin of the Report
This project paper is prepared to give an idea about the performance of Pharmaceutical &
Chemical industry from 2001 to 2013. A scenario of determinants of dividend policy
condition has been shown in this paper. To prepare this report I choose the annual report of
DSE of 2001- 2013. The preparation and submission of this term paper is mandatory
requirement of the BUS 498 course.
Objectives of the Study
There are some objectives behind every study and our work is not an exception. So I have
also some objectives. The relevant objectives are listed below.
Primary: It is actually a broad objective and our primary objective is to determine the
position of Pharmaceuticals & chemical industry by analyzing their profitability.
Secondary: The secondary objectives of this study are:
To present an overview of pharmaceutics & chemical industry.
To appraise the industrys Dividend Policy.

 To discuss about performance of Pharmaceuticals & chemical industry from 2004 to

2013
To identify and analyze pharma policy measure that influences the flow of profit.
To identify different types of independent variables that help to analyze the profit of
Pharmaceutical & chemical industry.
To identify different factors that effect profit earnings of pharmaceuticals & chemical
industry.
To analyze the present value of pharmaceutical & chemical industry.
The objectives of this report is to make readers know about Pharmaceuticals &
chemical industry and to provide information about their Dividend Policy &
profitability.
To provide some suggestions about the improvement of performance of
Pharmaceuticals & chemical industry.
Research Methodology:
Methodology of my study includes the whole process that I have conducted our assignment.
While doing our assignment I have used multiple techniques, two types of data and they are
listed below.
Primary data: I will collect some important data about Pharmaceuticals & chemical industry
from Dhaka Stock Exchange from some employees of DSE.
Secondary data:
The study uses a secondary data collection method to appraise the dividend policy of Pharmaceuticals &
chemical industry. The Project was primarily prepared by making some analytical approach. The main
source of data for this report is Annual reports. For the fulfillment of my projects purpose, I had
selected ten year (2004-2013) annual reports. I also collected data from different websites, Different
books, newspapaer, journals and different articles. The existing guidelines, documents and other
supporting papers relevant to this assignment were also consulted and examined.
Statistical method of multiple regression analysis has been applied in this study. Time frame
of this research is 10 years slot (2004 to 2013). Every company has been analyzed with same
parameter over these periods.

Literal review
Many studies have been conducted on dividend policies earlier which explicate the
determinants of dividend policy. These studies help new researchers explore the dividend
policy in a new way. Researchers have indicated that growth of a firm can influence its
dividend policy.
Weidenfeld & Nicholson (1970) concerned profit as a reward to owner of capital but with the
return to capital as an objective of a firms activities. Weston (1978) mentioned that profits
are the test of efficiency and a measure of control, to the owners, a measure of the worth of
their investment, to the creditors the margin of safety, to the employees a source of fringe
benefits, to the Government a measure of taxable capacity and the basis of legislative action;
to the country profits are an index of economic progress, national income generated and rise
in the standard of living. According to Pandy (1979) recent experience in countries with
totally planned economies indicates that economists are probably right in emphasizing the
importance of overall profitability as a criterion for the efficient operation of an enterprise.
On the other hand, Walstedt (1980) in his book entitled State Manufacturing Enterprises in a
Mixed Economy: Turkish case stated that profitability of an enterprise can be ascertained, if
profit is analyzed in terms of sales and investment. The return on sales, return on investment,
and return on equity are the main measure of profitability. Schmalensee (1987) stated that to
determine whether systematic changes in intra-industry profitability occurred over time so as
to distinguish between an efficiency story and a collusion story about why concentrated
industries had higher profit rates than other industries. Further, he found that large firms in

general were more profitable than small firms within the same industry. Velnampy &
Nimalathasan (2007) indicated that sales are positively associated with profitability ratios
except return on investment, and numbers of depositors are negatively correlated to the
profitability ratios except return on equity, Likewise, number of advances is also negatively
correlated to the return on investment, and return on average assets in Bank of Ceylon.
Further they(2008) pointed out there is a positive relationship between Firm size and
Profitability in Commercial Bank of Ceylon Ltd, but there is no relationship between firm
size and profitability in Bank of Ceylon. Sexton & Kasarda.(2000) found that firm
profitability was correlated with sustainable growth, while Chandler and Jensen (1992) found
that sales growth and profitability werenot correlated. Based on the above literatures, we can
say that various studies have beendone on this area, but a detailed and comprehensive study
has not yet been conducted in Bangladesh context, especially in pharmaceutical companies.
Hence, the present study is initiated Profitability of Listed pharmaceuticals Companies with
three (10) years accounting period from 2004-2013.

Limitations
To make a project various aspects and experience are needed. But I faced some barriers for making a complete
and perfect report. These barriers or limitations, which hinder our work, are as follows:
The insufficiency of information is main constraint of the study.
I got the information after a little bit late than I expected.
In many cases, up to date information was not published.
The study limits only on the available published data and certain degree of availability in internet.
Availability of the reference book in another limitation
Technical problems.
Lack of statistical knowledge
Lack of computer skill.
Lack of proper information
To complete the research only depend on annual reports

Overview of Pharmaceuticals industries in Bangladesh

The pharmaceutical industry of Bangladesh is one of the most significant and Technology
advanced sectors in the country. Before 1980, this industry was at a very primitive and
underdeveloped stage, with little private investments and very little government support and
resource allocation. However, as Habib and Alam (2011) profess, after the promulgation of
the Drug Control Ordinance in 1982, the sector began accelerating at a break neck speed.

In time, the pharmaceutical industry became one of the thrust sectors of the country's
economy, and is now the third largest industry of the country in terms of contribution to the
government's revenue. There has been substantial growth in the pharmaceutical market itself
in the last few years. For example, as the report by Saad (2012) outlines, pharmaceutical sale
in 2007 worth BDT 4,000 core, and it almost doubled by 2010 while in 2011 it was over BDT
9,000 core. At present, there are over 250 different licensed pharmaceutical firms in
Bangladesh, but only around 173 are in operation, as the rest have either closed voluntarily or
been suspended due to non-compliance of relevant laws and regulations. But Saad (2012)
indicates that one of the salient features of the pharmaceutical sector is that it is highly
dominated by a group of 20 top companies, who share about 85%of the total revenue of the
market.
Some of these firms are Squar Pharmaceuticals Ltd, Incepta Pharmaceuticals Ltd, Beximco
Pharma Ltd., Renata Ltd , ACI limited, Ambee pharmaceuticals, Beximco synthetics, Glaxo

smithkline, IBN SINA pharmaceuticals, Imam Button Industry, Keya cosmetics, Kohinur
chemicals, Libra influsions, Orion influsions, Pharma Aids limited, Reckitt Benckiser, Water
chemmicals and so on. Compared to the size of the Bangladeshi population, the
pharmaceutical market of the country is quite small. Much of this is owed to the lack of
spending capacity of the general people. In fact, pharmaceutical spending in this country is
one of the lowest in the world. While globally, healthcare expense relative to GDP is around
10.03% as of 2009, according to Saad (2012), in Bangladesh the figure is just 3.35%.
The pharmaceutical industry is one of the most developed industrial sectors of Bangladesh.
There are approximately 250 companies active in the market at the moment. This rapidly
growing industry contributes almost 1% of the GDP and is currently the third largest tax
paying sector in the country. USA-based research firm IMS had stated in 2009 that the retail
pharmaceutical market value in Bangladesh is around BDT 55 billion. The annual average
growth rate of pharmaceuticals has hit double digit since 2009.
The pharmaceutical sector of Bangladesh has achieved a great reputation worldwide for its
quality products. This can be seen by the increasing number of export orders the companies
are getting from foreign buyers. Back in the 1980s, only a couple of companies exported
pharmaceutical products to only Myanmar, Sri Lanka and Nepal. Now this sector is exporting
products in 52 different countries. These products include high tech medicines such as
inhalers, suppositories, and infusions and inject able. A massive opportunity opened up for
Bangladesh after WTO/TRIPs Patent Law was implied which has made it possible for
Bangladeshi pharmaceutical companies to export patented drugs until January 2016.
Local companies achieved a great deal of success in the local market as well. Their quality
products have become highly popular among the locals which eliminated the need to buy
foreign products. Because of the local companies, people can buy medicines for a cheaper
price. The price would have been much higher if the medicines had to be imported. A large
number of local companies have won accreditation in the past from foreign regulatory
authorities such as EMEA (Austria) and TGA (Australia). This proves that the local
companies are using strict protocol in manufacturing and competing with global brands.
The future growth of this promising sector largely depends on the availability of API (Active
Pharmaceutical Ingredient). Some of the companies recently took initiative to manufacture

these ingredients but still the production it is not even close to the demand. To make this
industry flourish, more API industries need to be set up. The government should offer more
incentives to those who invest in the API industries. If this is ensured, a growth rate of 80%
can be expected in the coming years.
The biggest name in the pharmaceutical sector of Bangladesh is Square Pharmaceuticals. It
has a market share of 19.3%. Incepta Pharmaceutical and Beximco Pharmaceuticals
respectively have 8.5% and 7.6% market share. The domination of local companies can be
seen by the fact that even though a good number of multinational companies are active in the
pharmaceuticals sector, none of them are in the top 10 list when it comes to market share.
As mentioned earlier, the pharmaceutical products are in a huge demand in the local market
and local and international regulatory authorities are extremely pleased with the standard. If
the companies can capitalize on these strong points along with the fact that health expenditure
is rapidly increasing, a significant improvement can be noticed very quickly in the sector.
Bangladesh is the eighth largest densely populated country of the world which is 2.3 per cent
of the total size around the globe. With this population, Bangladesh has an emerging
economy in the world. During the last 10 years, the GDP growth rate is consistently >6.5 per
cent and industrial or manufacturing growth rate is 11.2 per cent which is remarkable.
In the health sector, Bangladesh has emerged rapidly during the last 10 years. The
infrastructure has developed during this period. Bangladesh has achieved tremendous success
in pharmaceutical sector as well. Pharmaceutical industry is using state-of-the-art
manufacturing technology and highly skilled human resources. This industry is the fastest
growing sector in Bangladesh. The domestic market size is US$1.136 billion with a growth
rate of 23.59 per cent in 2011. During the last several years, this sector is having significant
growth. Within next 4-5 years, the expected market size of Bangladesh would be around US$
2.5 billion per year.
The pharmaceutical industry of Bangladesh is a wonder and one does not require a degree in
finance or economics to be able to see the truth in this statement. In a country characterized
by political instability and omnipresent corruption, while almost every other form of
industries is facing impeding obstacles, the relative calm and stability conspicuous in the

pharmaceutical industry are astonishing.

There are 260 registered pharmaceutical companies, among which 191 are in operation. The
manufactured products of these companies are meeting 97per cent of the domestic
requirement. Some vaccines, anticancer products, hematological products, biotech products
are being imported. These 191 companies are marketing more than 1350 molecules with
23500 brands in the country. Bangladesh pharmaceutical industry is dominated by the local
pharma companies, i.e. 90 per cent of the market share is owned by the local companies. Top
20 companies are enjoying 82 per cent market share.
Bangladeshi pharmaceutical companies plan to strengthen their global foot-print as they
target to take their products to 30 new destinations within 2013-14. Country's pharmaceutical
industry has made big strides since the enforcement of the National Drug Policy back in
1982. The sector has gone through a sea change over the last three decades. The
multinational pharmaceutical companies that once used to dominate the sector now have an
insignificant presence. At present, Bangladesh exports pharma products to 87 countries,
including the US and a few European nations, after meeting 97 per cent of the local demand
by the domestic companies, some of which are fitted with most modern and state- of-the-art
manufacturing facilities. The pharmaceutical sector has also been making its mark in the field
of export. Last year, the country fetched over Tk.4.0 billion through export of medicines. The
export potential is, however, far larger.
Pharmaceutical export is contributing substantially to the GDP of the country, and every year,
this contribution is increasing at a greater pace. In terms of foreign currency, pharma sector
has been ranked as the second largest potential sector in Bangladesh.
While Bangladeshs earnings from remittance and RMG exports are facing threats due to
global economic and political reasons and domestic problems the impressive prospect of
pharmaceutical export is reassuring.
According to the IMS, the size of Bangladesh's domestic drug market was $977 million in
calendar year, 2010, $797 million in 2009, and $686 million in 2008, on the basis of moving
annual total (MAT).

The IMS, a US-based organization, has been providing pharma market intelligence to more
than 100 countries over the past 50 years. Its factual data are based on the country's retail
sales only. Institutional sales and import of drug has remained outside the purview of the
study. The market size has doubled over the last
five years, mainly due to increased penetration by the local drug manufacturers.
Accounting for just 0.2 per cent of non-OECD pharmaceutical exports in 2009, Bangladesh
has a tiny share of the global market 0.01 per cent in 2009. Even so, it has by far the largest
pharmaceutical sector, and the largest pharmaceutical exports, of all Least Developed
Countries.
Exports of pharmaceuticals from Bangladesh are still small in scale at just around US$
67.45m in 2012, worth approximately five per cent of the value of sales in the domestic
market. However, they are increasing rapidly at a compound annual growth rate of 26.1 per
cent between 2002 and 2012. Most of the growth is coming from exports to middle income
countries and to nearby low income countries (Myanmar, Afghanistan, Nepal). While exports
to the EU reached almost US$15 million in 2007, they have fallen off since. Most exports are
to markets where pharmaceuticals are unregulated to medium regulated. Even relatively
lightly regulated markets can be challenging to access, with significant delays to obtaining
approval.
The Bangladesh Pharmaceutical Industry Association has set out a vision of growth for the
future, called Pharma Vision 2015.
Bangladesh is taking the advantage of TRIPS agreement as being a LDC is exempted from
patent protection until 2016. Bangladesh is a market of cheap labour. Thats why MNCs are
interested for contract manufacturing and strategic alliance. Moreover, skilled personnel are
produced in the country. Presently, Bangladesh is getting the leverage from TRIPS agreement
being one of the LDCs, so that we can manufacture even varieties of patented molecules and
export them, mainly to other members of LDCs because they are not as well-equipped as
Bangladesh. Bangladeshi pharmaceutical companies have already developed their
manufacturing facilities with skilled and trained personnel since its independence. The
pharma companies earned the potential to easily penetrate into all the LDCs, some Asian and

African moderately regulated countries. In addition, pharma industries of Bangladesh are

now on the verge of entering into highly regulated overseas markets like Australia, USA and
Europe. So it is just a matter of time for Bangladeshi companies to become a major generic
player in the globe.

Determinations of Dividends Policy

The dividend policy of a firm determines what proportion of earnings is paid to shareholders
by way of dividends and what proportion is ploughed back in the firm for reinvestment
purpose. If a firmscapital budgeting decision is independent of its dividend policy, a higher
dividend payment will call for a greater dependence on external financing .Thus,the dividend
policy has a bearing on the choice of financing . On the other hand, firmss capital budgeting
decision is independent on its dividend dicision; a higher dividend payment will cause
shrinkage of its capital budget and vice versa. In such case, the dividend policy has a bearing
on the capital budgeting decision.
When a company earns profits from operations, management can do one of two things with
those profits. It can choose to retain them - essentially reinvesting them into the company with
the hope of creating more profits and thus further stock appreciation. The alternative is to
distribute a portion of the profits to shareholders in the form of dividends. Management can
also repurchase some of its own shares - a move that would also benefit shareholders.
A company must keep growing at an above-average pace to justify reinvesting in itself rather
than paying a dividend. When a company's growth slows, its stock won't climb as much, and
dividends will be necessary to keep shareholders around. This growth slowdown happens to
virtually all companies after they attain a large market capitalization. A company will simply
reach a size at which it no longer has the potential to grow at annual rates of 30-40% like a

small cap, regardless of how much money is plowed back into it. At a certain point, the law of
large numbers makes a mega-cap company and growth rates that outperform the market an
impossible combination. In this section, we'll take a deeper look at the different types of
dividends and the mechanics of dividend payments; how companies establish dividend policy
and the different types of dividend policies; the reasons why companies and investors might
prefer higher, lower or no dividend payments; and share repurchases, stock splits and stock
dividends as an alternative to cash dividends.
Dividend:
The term dividend refers to that portion of profit which is distributed among the
owner/shereholders of the firm. A dividend policy is a company's approach to distributing
profits back to its owners or stockholders. If a company is in a growth mode, it may decide
that it will not pay dividends, but rather re-invest its profits (retained earnings) in the
business. If a company does decide to pay dividends, it must then decide how often to do so,
and at what rate. Large, well-established companies often pay dividends on a fixed schedule,
but sometimes they also declare "special dividends." The payment of dividends impacts the
perception of a company in financial markets, and it may also have a direct impact on its
stock price.

Types if dividends:
There are three main approaches to dividends: residual, stability or a hybrid of the two.
Residual Dividend Policy
A policy in which the dividend paid is set equal to the actual earnings minus the amount of
retained earnings necessary to finance the firms optimal capital budget.
Companies using the residual dividend policy choose to rely on internally generated equity to
finance any new projects. As a result, dividend payments can come out of the residual or
leftover equity only after all project capital requirements are met. These companies usually
attempt to maintain balance in their debt/equity ratios before making any dividend
distributions, deciding on dividends only if there is enough money left over after all operating
and expansion expenses are met.

For example, let's suppose that a company named CBC has recently earned $1,000 and has a
strict policy to maintain a debt/equity ratio of 0.5 (one part debt to every two parts of equity).
Now, suppose this company has a project with a capital requirement of $900. In order to
maintain the debt/equity ratio of 0.5, CBC would have to pay for one-third of this project by
using debt ($300) and two-thirds ($600) by using equity. In other words, the company would
have to borrow $300 and use $600 of its equity to maintain the 0.5 ratio, leaving a residual
amount of $400 ($1,000 - $600) for dividends. On the other hand, if the project had a capital
requirement of $1,500, the debt requirement would be $500 and the equity requirement
would be $1,000, leaving zero ($1,000 - $1,000) for dividends. If any project required an
equity portion that was greater than the company's available levels, the company would issue
new stock.

Dividend Stability Policy

Payment of a specific dollar dividend each year, or periodically increasing the dividend at a
constant rate- the annual dollar dividend is relatively predictable by investors.
The fluctuation of dividends created by the residual policy significantly contrasts with the
certainty of the dividend stability policy. With the stability policy, quarterly dividends are set
at a fraction of yearly earnings. This policy reduces uncertainty for investors and provides
them with income.
Suppose our imaginary company, CBC, earned $1,000 for the year (with quarterly earnings of
$300, $200, $100 and $400). If CBC decided on a stable policy of 10% of yearly earnings
($1,000 x 10%), it would pay $25 ($100/4) to shareholders every quarter. Alternatively, if
CBC decided on a cyclical policy, the dividend payments would adjust every quarter to be
$30, $20, $10 and $40, respectively. In either instance, companies following this policy are
always attempting to share earnings with shareholders rather than searching for projects in
which to invest excess cash.

Constant payout ratio

Payout of a constant percentage of earnings as dividends each year. A dividend policy
based on the payment of a certain percentage of earnings to owners in each dividend period.
The percentage of earnings paid to shareholders in dividends. It would possible for a industry

to pay out a constant percentage of earnings, but because earnings surely will fluctuate, this
policy would mean that the dollar amount of dividends would vary. For example, if Eastman
Kodak had followed the policy of playing a constant percentage of earnings per share, say 40
percent, the dividends per share paid since 1978 would have fluctuated exactly the same as
earnings per share.

Low regular dividend plus extras

A policy of paying a low regular dividend plus a year end extra in good years is a
compromise between a stable dividend and a constant payout rate. Such a policy gives the
firm flexibility, yet investors can count on receiving at least a minimum dividend. Therefore,
if a firms earnings and cash flows are quite volatile
Hybrid Dividend Policy
The final approach is a combination between the residual and stable dividend policy. Using
this approach, companies tend to view the debt/equity ratio as a long-term rather than a shortterm goal. In today's markets, this approach is commonly used by companies that pay
dividends. As these companies will generally experience business cycle fluctuations, they
will generally have one set dividend, which is set as a relatively small portion of yearly
income and can be easily maintained. On top of this set dividend, these companies will offer
another extra dividend paid only when income exceeds general levels.

Why do companies pay dividends?

If investors have to pay higher taxes on dividends than in capital gains, then firms that pay
dividends should have a higher cost of equity than firms that do not pay dividends.
Thus, why do firms pay dividends?
One argument to justify the payment of dividends is that dividends are cash in hand, while
capital gains are cash in the bush. Capital gains to be received in the future should be riskier
than the dividends received today.
Think about investor YES who invested in a firm that pays dividends and investor NO who
holds shares of a firm that does not pay dividends. Is investor YES better off than investor
NO? Investor YES receives the cash now, but what is she going to do with this cash? She
might want to spend it, but investor NO could also sell her shares and spend the proceeds. If
investor YES wants to invest the money she will face the appropriate level of risk.

It is important to remember that the value of the firm is equal to future cash flows
discounted at the appropriate discount rate. There is no reason to think that the future cash
flows will change with the dividend policy, and under the M&M assumptions, there is no
reason to believe that the payment of dividends will change the discount rate.
How Companies Pay Dividends:
Dividend payouts follow a set procedure. To understand it, first we'll define the following
terms:
1. Declaration Date
The declaration date is the day the company's board of directors announces approval of the
dividend payment.
2. Ex-Dividend Date
The ex-dividend date is the date on which investors are cut off from receiving a dividend. If,
for example, an investor purchases a stock on the ex-dividend date, that investor will not
receive the dividend. This date is two business days before the holder-of-record date.
The ex-dividend date is important because from this date forward, new stockholders will not
receive the dividend, and the stock price reflects this fact. For example, on and after the exdividend date, a stock usually trades at a lower price as the stock price adjusts for the
dividend that the new holder will not receive.
3. Holder-of-Record Date
The holder-of-record (owner-of-record) date is the date on which the stockholders who are
eligible to receive the dividend are recognized.
4. Payment Date
last is the payment date, the date on which the actual dividend is paid out to the stockholders
of record.

How to Optimize the Dividend Payout Ratio?

Dividend-payout ratio optimized:

Dividend policy like all business decisions can be optimized only in terms of the objectives
that the financial management of the company is trying to achieve. The objective of financial
management is to maximise the firms net present worth.

Image Courtesy: myfijourney.files.wordpress.com/2013/01/nsc-jan-2013-payout-ratio.png

This objective is a valid guide to financial decisions for all transactions not involving the
transfer of assets between the corporate entity and the shareholders. For these external
transactions the maximisation of the firms net present worth naturally results in the
maximisation of the shareholders wealth.
However, in the case of dividend policy, since cash is transferred from the corporate entity to
its shareholders, the wealth of the shareholders is measured not only by the value of their
shares, but also by the amount of cash dividends that they receive. Therefore, maximisation
of the firms net present worth may not result in the maximisation of the shareholders
wealth.
For example, it is possible that a company can maximise its net worth and share prices by not
paying any dividends at all. But such a dividend policy could actually reduce the wealth of
the shareholders if the return on the retained earnings is lower than the rate at which investors
capitalise the earnings of the company.

Share-price-maximisation is a necessary but not a sufficient condition for shareholders

wealth maximisation. The reason for going beyond the share-price-maximisation goal is that
dividend payments can at times reduce the market share price, and yet increase the
shareholders wealth.

Shareholders wealth maximisation is a more fundamental goal since dividend payments are
not meant to enlarge the supply of funds to the owners, but to increase their wealth.

Profitability of the Pharmaceutical Industry:

The pharmaceutical market of Bangladesh very much dynamic and competitive and is
comparable to those of developed countries. It is a matter of great pleasure that this sector
successfully fulfils major portion of local demand of pharmaceutical products and at the same
time it is moving forward to explore the international market for chemicals and
pharmaceuticals products. The contribution of pharmaceuticals companies in Bangladesh to
the national economy is encouraging. The investment in this sector is increasing which
speaks about the potentiality in this sector. This sector satisfies the demand of the local
market and also goes for export to explore the international market. Presently these industries
exporting medicines to more than 50 countries of the world. Hence, the present study is
initiated Profitability of Listed pharmaceuticals Companies: ACI Ltd, Ambee, Beximco,
Beximco synthetics, Glaxo Smithkline Ibn Sina, Imam button, Keya cosmetics, Kohinoor
chemicals, Libra Infusion, Orion infusion, Pharma Aids, Reckitt Benckiser,Reneta ltd And
Squre pharmaceuticals& chemicals industry in Bangladesh with ten (10) years accounting
period from 2004-2013. The study reveals that Pharmaceuticals Ltd should be considered as
satisfactory its indicators of profitability. It can be concluded that the profitability of
pharmaceutical companies is very much satisfactory as both of the companies according to
the standard norms of profitability in terms of investment.

Conceptual Framework
A descriptive statistical analysis has been carried out to find the mean values of these ratios
for the pharmaceuticals companies, which is help to understand of finance and business
structure of the firm, and the extent of their profitability. The standard deviation to be
obtained from the descriptive statistics has also enabled the understanding of the variations of
these values from the mean across different firms. It has revealed the extent of concentration
of profitability otherwise amongst the firms under study.
In the second phase of the analysis, Gross Profit Margin (GPM) has been considered as the
dependent variable while SGA/SALES, INV/COGS, AR/SALES, AP/COGS AND

DEP/SALES variables have been considered as the independent variables. This study has
chosen Gross Profit Margin as the dependent variable because it is a direct measure of
Profitability; Gross Profit Margin reflects the financial health of a company. This accounting
ratio expresses the proportion of funds left over from a firm's revenues after subtracting the
Cost of Goods sold. To test whether ratios such as SGA/SALES, INV/COGS, AR/SALES,
AP/COGS AND DEP/SALES are significant determinants of profitability or not, it
is necessary to examine their relationships against a ratio which is already a measure of
profitability for the firms. For such reasons, Gross Profit Margin has been adopted as the
measure of profitability of choice, and hence the dependent variable against which the
independent variables will be tested. Gross Profit Margin is also an indicator of the core
function of business for the pharmaceutical firms, and therefore would be a better measure of
Profitability for these studies than similar other ratios like Operating Margin. On the other
hand, SGA/SALES, INV/COGS, AR/SALES, AP/COGS AND DEP/SALES were chosen as
the independent variables because these ratios concern the Costs of Goods Sold and Sales
aspects of the business of the pharmaceutical firm. Since Gross Profit Margin is related with
Cost of Goods sold; it makes sense to choose those financial ratios as independent variables
which have some tangible relationship with these forces. The chosen independent variables of
this study fulfill that goal.
In another parts of this study, the Coefficient model has been applied to determine the degree
of correlation between the dependent variable and the independent variables. It has been done
to ensure that a certain level of linear relationship exists between the dependent variable and
each of the independent variables. This is necessary because test these ratios as determinants
for profitability of the pharmaceutical industry, a multiple regression analysis have to be carry
out. This regression cannot give proper results if linear relationships do not exist between the
dependent variable and each of the independent variable. Coefficient means these relationships
are positive or negative .A positive relationship means increase or decrease in value of the
independent variable will effect a corresponding change in the dependent variable On the other
hand, a negative relationship denotes increase or decrease in value of the independent variable
will effect an opposite change in the dependent variable. A regression model has been
developed taking into account the assumed relationship between the dependent variable GPM
and the independent variables which are SGA/SALES, INV/COGS, AR/SALES, AP/COGS
AND DEP/SALES.

Finally, a multiple regression analysis has been carried out upon the dependent variable and
the independent variables to know the effects of the latter over the former. Specifically, this
analysis has helped understand the significance of the assumed determinants over profitability
of the pharmaceutical firms, and whether or not they are valid as determinants. The
significance and validity of the model as a whole has also been revealed through this analysis.
In the process, the study also tested the validity of a set of predetermined hypotheses, formed
on the basis of null hypothesis concept. These hypotheses have established a greater
understanding on the overall relationships between the dependent variable and each of the
independent.
The descriptive statistics analysis, the Pearson Coefficient model and the multiple regression
analysis have all been carried out collecting necessary data from annual reports of the
pharmaceutical firms under question, and by using IBM SPSS 20.0 software.

No.

Financial Ratio

Method of Calculation

Gross Profit Margin

Gross Profit/Sales

SGA/SALES

Selling & General Administrative Expenses/Net Sales

INV/COGS

Average Inventory/Cost of Goods Sold

AR/SALES

Average Accounts receivable/Net Sales

AP/COGS

Average Accounts Payable/Cost of Goods Sold

DEP/SALES

Depreciation/Net Sales

Development of hypothesis
In the process of testing financial ratios to ascertain whether they are significant determinants
of profitability for the pharmaceutical & Chemicals industry of Bangladesh, this study has
designed a certain number of hypotheses, whose validity is to be verified in the course of
analyzing the validity of the determinants. This study has developed the following
hypotheses, and through regression analysis they will either be confirmed or rejected:
H1: SGA/SALES ratio has no significant relationship with Gross Profit Margin of the
selected pharmaceutical companies.
H2: INV/COGS have no significant relationship with Gross Profit Margin of the selected
pharmaceutical companies.
H3: No significant relationship exists between the ratio AR/SALES and Gross Profit Margin
of the selected pharmaceutical companies.
H4: There is no significant relationship between AP/COGS and Gross Profit Margin of the
selected pharmaceutical companies.
H5: DEP/SALES ratio has no significant relationship with Gross Profit Margin of the
selected pharmaceutical companies.

Development of profitability determinant model -regression

model:
The study has taken Gross Profit Margin as the measure of profitability, or the dependent
variable, while the rest has been considered as independent variables. To perform the
regression analysis, taking into account all relevant factors, the following regression model
has been developed:
GPM = b0+ b1SGA/SALES + b2INV/COGS + b3AR/SALES +
b4AP/COGS+b5DEP/SALES + e

Where,
GPM = Gross Profit Margin
SGA/SALES = Selling and General Administrative Expenses/ Net Sales
INV/COGS = Average Inventory/Cost of Goods Sold
AR/SALES=Average Accounts Receivable/Net Sales
AP/COGS=Average Accounts Payable/Cost of Goods Sold.
DEP/SALES =Depreciation/Net Sales

Sample Selection
The purpose of data analysis the annuals reports of these companies for the period of 2004 to
2013 were procured. The ten chosen companies are mentioned hereunder:
1. ACI Limited
2. Ambee Pharmaceuticals
3. Beximco
4. Beximco Synthetics
5. Glaxo Smithkline
6. IBN SINA
7. Imam Button Industry
8. Keya cosmetics
9. Kohinoor Chemicals
10. Libra Infusion
11. Orion Infusion
12. Pharma Aids Ltd
13. Reckitt Benckiser
14. Reneta Ltd
15. Squre Pharmaceuticals
16. Water Chemic

Profitability analysis:
Profitability analysis is a tool which is used as a way of analyzing the profitability of
the company. There are many different ways for you to analyze profitability. We'll focus
our attention on profitability ratios, which are a way to measure of the business'
ability to generate revenue compared to the amount of expenses it incurs. Let's look at a
few of the primary analytical approaches.

Profitability ratio:
A profitability ratio is a measure of profitability, which is a way to measure a
company's performance. Profitability is simply the capacity to make a profit, and a
profit is what is left over from income earned after you have deducted all costs and
expenses related to earning the income

Types of Profitability Ratios:

Common profitability ratios used in analyzing a company's performance include gross profit
margin (GPM), operating margin (OM), return on assets (ROA), return on equity (ROE),
return on sales (ROS) and return on investment (ROI).

Gross Margin:
Gross margin talks about the profitability of companys goods and services. It says how it
costs company produce the product .It is calculated by dividing companies gross profit by
companies net sales and multiplying the quotient by 100,

Profitability Ratio:
Net Profit margin
Net Profit margin = Net profit after tax/sales
Net Profit margin ratio
Gross Profit margin ratio= Gross profit/sales
Return on Total Assets
Return on Total Assets = Net profits after taxes / total assets
Return on common stock equity
Return on common stock equity = Net income / Common stockholders equit
Operating Profit Margin
Operating Profit Margin = Operating profits / Sales
Net profit margin