Main Activities in Corporate Finance

RUNNING HEAD: CORPORATE FINANCE
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Investment appraisal and shareholders wealth

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Executive Summary
Corporate finance is an aspect of finance that highlights the different sources of funds used
by corporate to raise funds, efficient capital structure for companies, and activities that
managers follow in order increase shareholder value. This report highlights the dividend
payment theories and the impact of dividend payment on share prices. In order to
understand these concepts a company listed in Colombo stock exchange has been chosen that
is Lanka Hospital. In order to understand the financial position, dividend payment method,
dividend per share, earnings per share and its impact on share prices comparison is done with
other players in the market that are Nawaloka Hospital and Asiri Hospital. At last, the report
includes recommendations to companies about dividend policy and strategies that can be
adopted by companies to improve its shareholders value.

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Table of Contents
Part 1: Introduction....................................................................................................................2
Dividend and earnings per share of six years.........................................................................3
Share price of three companies for six years..........................................................................4
Part 2 : Dividend Theories.........................................................................................................5
Part 3 Strategies and Shareholder Value....................................................................................7
Bibliography.............................................................................................................................10

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Part 1: Introduction
Lanka Hospital
Lanka Hospitals is multi-speciality care hospital situated in Sri Lanka. The hospital was
opened in 2002 as a branch of Apollo Hospitals but later on acquired by Sri Lanka insurance
in 2009 and renamed as Lanka Hospitals. The vision of the hospital is to become a preferred
private hospital by people and to contribute to the greater extent for building of healthier
community. At present, hospital has staff of 1,868 people and has capacity of 28,000 patients
in hospital. Further, revenue of hospital in 2018 was Rs. 7.08 billion and net income was Rs
870 million (LankaHospital,2018).
Nawaloka Hospital
Nawaloka Hospital is one amongst the biggest competitor of Lanka Hospital in private sector.
There are chain of hospitals of Nawaloka across the country. The unique proposition and
services that hospital provide includes facilities of Intensive care unit, Thoracic surgery,
Coronary care units and Laparoscopic surgery. The hospital was established in 1985 as a
private healthcare institution. The objective of hospital is to provide affordable healthcare
services to all of patients that come from different strata of society. In 2018, the net income
of hospital was Rs 180 million (NawalokaHospital,2018).
Asiri Hospital
Asiri Gospital is also a well renowned named in Sri Lanka in private hospitals. The hospital
started its first operation in 1986. There are four other branches of this hospital in Sri Lanka
specialised in serving some services. In 2018, the net profit of hospital was Rs 1740 million
and revenue of hospital during the year was Rs 12,025 million. These three hospitals are

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well known in Sri Lanka and have proper facilities and performing well in terms of adding
shareholder value and profit maximization (AsiriHospital, 2018).
Dividend and earnings per share of six years
2013 2014 2015 2016 2017 2018
0
0.5
1
1.5
2
2.5
Dividend Per Share 6 Years trend
Lanka Hospital
Nawaloka Hospital
Asiri Hospital
Dividend Per Share
Figure 1: Dividend per share for last six years
Source: (Investing.com,2020)
2013 2014 2015 2016 2017 2018
0.00
0.50
1.00
1.50
2.00
2.50
3.00
3.50
4.00
4.50
5.00
Earnings Per Share 6 years trend
Lanka Hospital
Nawaloka Hospital
Asiri Hospital
Earnings Per Share
Figure 2: Earnings per share for last six years
Source: (Investing.com,2020)

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From the above analysis of divided per share and earnings per share of the hospitals it can
be said that Asiri Hospital and Lanka Hospital dividend payments were fluctuating but the
shareholders get higher return from Lanka hospital as there dividend per share won an
average is Rs 2 and earnings per share is Rs 3. Hence, investing in Lanka Hospital is a good
option as compare to its competitors in the same industry the position of Lanka Hospital
shows positive growth in near future.
Share price of three companies for six years
2013 2014 2015 2016 2017 2018
0
10
20
30
40
50
60
Lanka Hospital
Nawaloka Hospital
Asiri Hospital
Share Prices
Figure 3: Share prices of Lanka Hospital for last 6 years compare to its competitors
Source: (WSJ,2019)
From the above graph it can be said that share prices of Lanka Hospital had increased from
2013 by 62% in 2018. This indicates that the company shareholder value has increased
during the tenure of six years. Whereas, Asiri Hospital share prices increased by 44 % till

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2018 and Nawaloka Hospital prices by 57 % till 2018. From this it is concluded that value
for shareholders or in term of growth prospectus Lanka Hospital is a best and suitable option.
Part 2 : Dividend Theories
According to Grennan, 2019, dividend is a payment that organizations pay to its shareholders
as a reward of their investment in the organization. The ability of organizations to pay
dividend dictate the financial position of the company and shareholder value. Many
organizations pay regularly to their shareholders that send a clear message to investors that
the future financial performance of the company will be positive and powerful. The
companies that showed rising dividend and after cut off their dividend put negative
impression on investors or shareholders. Hence, in order to attract investment it becomes
necessary to pay dividend out of profits to their shareholders as their investment return.
a. Residual dividend policy
The resident dividend theory states that the companies that paid dividend after clearing all its
capital expenditure are the one that use residual dividend policy for paying dividend. From
the analysis of all three hospitals dividend policies it is found that Lanka Hospital, Asiri
Hospital pay standard amount of dividend to its shareholders and not depend on residual
policy as half of the net profits of both the organizations paid as dividend due to that there
average share price of Lanka Hospital in 2018 was Rs 56.7 but share prices of Asiri
decreased due to decrease in amount of dividend paid by the organization in 2017
(Investing.com Asiri, 2019).

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b. Dividend stability policy
Dividend stability policy focuses on the concept that fluctuation of dividends because of
residual policy leas to the organizations to pay fraction of its profit as dividend to its
shareholders. “This policy reduces the uncertainty for investors as there is stability in the
dividend payment system of the organizations”. Lanka Hospital follow dividend stability
policy due to that share prices of the hospital are increasing and the financial performance of
the company is also improving. As dividend paid by Lanka hospital in 2013 was fraction of
its shareholders equity due to that dividend per share was Rs 2 and after that in 2016 that
dividend paid by the company was fraction and with that dividend per share stood at Rs 2.
Due to dividend stability policy hospital is getting benefit as the share prices of hospital
improve by 62 % and on average earnings per share is Rs 3.5. On the other side, hospitals or
competitors of Lanka Hospital are not using this policy due to that there is huge fluctuations
in the earnings per share and share prices of both the hospitals (Investing.com Lanka,2019).
c. Constant growth dividend theory
This model helps in to identify the intrinsic value of stock on the basis of future series of
dividend growth. This model state that dividend paid by the company increase in constant
rate every year. This model is mainly used by the organization that shows constant growth
rate and improving performance each and every year (Iftikhar et.al,2017).
From the analysis of hospitals financial performance and dividend per share and payment
stability it can be said that none of organizations from these three use this model. As there is
no such stability and constant growth in all the three hospitals. There profits and revenues of
last six years are fluctuating and due to that there are chances of losses and profits equally for
investors. This model cannot be applicable to these hospitals because of poor growth and

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stability and due to that share prices of the organizations are also fluctuating that gives clear
picture about the financial position of the organizations (Mwangi,2017).
d. Modigliani Miller theory
This dividend model states that there is no relevance between dividend paid and valuation of
the company as the past records of dividend payment cannot control the outcome of future
uncertain events. The investors focus on return on investment and the only thing that impact
on the valuation of the companies is its earnings. Hence, in a nutshell this theory states that
investment decision depend on the investment policy adopted by companies for future growth
not on dividend history of the companies.
From the hospitals that have chosen it is analyzed that Nawaloka Hospital adopted this theory
and do not focus on its dividend payment policy rather the hospital invest huge amount for
expansion and growth of its hospitals due to that the organization is able to expand across Sri
Lanka with various branches. This indicate that investment policy is also an important aspect
for investors to be considered as due to that it can be said that dividend per share of
Nawaloka Hospital stood at an average of Rs 0.05 but the hospital has large operations and
expansion plans
Part 3 Strategies and Shareholder Value
Dividend polices that are adopted by organization impact on the shareholders’ value. The
payment methods used by the firms depend on their expansion strategy and investment
strategy of the organizations. The company’s ability to pay depends on the cash inflows that
are generated by the companies during a year.

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Cash Flows
If cash flows of hospitals are higher that leads to more dividend payment to their
shareholders. On the other side, paying dividends to shareholders leads to reduction in cash
flow of hospitals. But give a positive and clear message to stakeholders that will impact on
the share prices of the organization and due to that shareholder value will increase
(GrennanLanka Hospital focuses on increasing its shareholder value by allowing dividend to
its shareholders so that shareholder value can be increased (Grennan,2019). Lanka hospital
use fraction pay method to pay its shareholders that helps the organization to improve its
shareholder value. On the other side, two competitors of Lanka Hospital pay dividend on the
basis of profits and growth. But the profits made by Nawaloka Hospital were low due to that
the company did not pay dividend in 2015 and the rate of payment of dividend in all the years
was low. This indicates that the company pay its dividends on the basis of residual model as
remaining profits of the organization were distributed as dividend.
However, the debt equity ratios of these three hospitals are; for Asiri hospital it is 141 % that
indicate that the company mainly depend on its equity shareholders for expansion and
growth. Lanka Hospital debt and equity ratio is 80.77% that indicate that the hospital is
mainly depend on the issues of shares or shareholder equity funds (Lankahospital,2018). On
the other side, in order to attract investors the company use stability dividend policy in which
investors have less risk as the dividend payment is given by the company on regular basis to
its shareholders.
Managing Business Risks
The ability of managing risk is influenced by various factors such as sales volume or revenue,
input costs, competition in the industry, economic climate, and regulations of the government
(Jahfer and Mulafara,2016). Lanka Hospital revenue in 2018 was Rs 1949.04 and as

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compare to its competitors the revenue of Lanka hospital is low as Asiri Hospital total
revenue in 2018 was Rs 12,025 million and Nawaloka hospital revenues were Rs 7,955 in
2018 (Asirihospital,2018). It can be said that the competitors scale of operation is bigger
than Lanka Hospital due to that shareholders value of Nawaloka hospital in the market is
good as in the private sector hospital industry , Nawaloka is able to establish itself and able to
manage all its risks efficiently. On the other side, Lanka hospital focus on increasing
shareholder value by managing other factors such as economic climate, competition in the
industry and market position.
It is recommended that Lanka Hospital should focus on stable dividend policy as from the
operations and cost analysis it is identified that hospital scale of operation is not more than its
competitors but the organization established its positive image in the market by focusing on
paying dividend, establishing its share prices and by increasing its shareholder value. Lanka
hospital should invest on the growth prospectus of hospital as this helps the organization to
grow and gain positive image in the market and helps in to compete with its competitors in
term of scale of operations and expansion.
It is concluded from the report that market position and shareholder value of Lanka Hospital
is strong but the organization is lacking in terms of its investment policy. The dividend policy
followed by Lanka hospital is based on fraction as the organization pay dividend as its
fraction of its equity holder’s amount and its competitors such as Nawaloka Hospital use
M&M policy and not focus on improving its dividend payment structure rather focus on
improving its investment strategy in order to attract more investors. Hence, Lanka hospital
should focus on stability dividend policy and growth model in order pass clear message to its
investors about growth of the organization in near future.

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References
Asiri Hospital, 2018. Annual Report 2018. Accessed From: http://www.asirihealth.com/asiri-
group/group-overview/financial-information
Grennan, J., 2019. Dividend payments as a response to peer influence. Journal of Financial
Economics, 131(3), pp.549-570.
Iftikhar, A.B., Raja, N.U.D.J. and Sehran, K.N., 2017. Impact of Dividend Policy on Stock
Prices of Firm. Theoretical & Applied Science, (3), pp.32-37.
Investing.com Asiri,2019. Financial Statement. Accessed From:
https://in.investing.com/equities/asiri-hospital-holdings-income-statement?
period_type=annually
Investing.com Lanka,2019. Financial Statement. Accessed From:
https://www.investing.com/equities/the-lanka-hospital-corporation-income-statement
Investing.com Nawaloka,2019. Financial statements. Accessed From:
https://in.investing.com/equities/nawaloka-hospitals-income-statement?
period_type=annually&periods=previous&period_type=annually&periods=latest&period_typ
e=annually
Investing.com,2020. Dividend per share and Earnings per share. Accessed From:
https://www.investing.com/
Jahfer, A. and Mulafara, A.H., 2016. Dividend policy and share price volatility: evidence
from Colombo stock market. International Journal of Managerial and Financial
Accounting, 8(2), pp.97-108.

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Lanka Hospital,2018. Annual Report 2018. Accessed From:
https://www.lankahospitals.com/wp-content/uploads/2019/05/ar2018_compressed.pdf
Mwangi, W.M., 2017. Testing the Gordon’s Growth Model. Research Journal of Finance
and Accounting, 8.
Nawaloka Hospital,2018. Annual Report 2018. Accessed From:
http://www.nawaloka.com/image/annual-report/pdf/Nawaloka_Hospitals_PLC_AR_2017-
18.pdf
WSJ,2019. Stock market. Accessed From: https://www.wsj.com/news/markets

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Bibliography
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Asiri Hospital, 2018. Annual Report 2018. Accessed From: http://www.asirihealth.com/asiri-
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Brealey, R.A., Myers, S.C., Allen, F. and Mohanty, P., 2012. Principles of corporate finance.
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Grennan, J., 2019. Dividend payments as a response to peer influence. Journal of Financial
Economics, 131(3), pp.549-570.
Gul, S., Sajid, M., Razzaq, N., Iqbal, M.F. and Khan, M.B., 2012. The relationship between
dividend policy and shareholder’s wealth. Economics and Finance Review, 2(2), pp.55-59.
Hillier, D., Ross, S., Westerfield, R., Jaffe, J. and Jordan, B., 2013. Corporate finance (No.
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Iftikhar, A.B., Raja, N.U.D.J. and Sehran, K.N., 2017. Impact of Dividend Policy on Stock
Prices of Firm. Theoretical & Applied Science, (3), pp.32-37.
Investing.com Asiri,2019. Financial Statement. Accessed From:
https://in.investing.com/equities/asiri-hospital-holdings-income-statement?
period_type=annually

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Investing.com Lanka,2019. Financial Statement. Accessed From:
https://www.investing.com/equities/the-lanka-hospital-corporation-income-statement
Investing.com Nawaloka,2019. Financial statements. Accessed From:
https://in.investing.com/equities/nawaloka-hospitals-income-statement?
period_type=annually&periods=previous&period_type=annually&periods=latest&period_typ
e=annually
Investing.com,2020. Dividend per share and Earnings per share. Accessed From:
https://www.investing.com/
Jahfer, A. and Mulafara, A.H., 2016. Dividend policy and share price volatility: evidence
from Colombo stock market. International Journal of Managerial and Financial
Accounting, 8(2), pp.97-108.
Kaźmierska-Jóźwiak, B., 2015. Determinants of dividend policy: evidence from polish listed
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Lanka Hospital,2018. Annual Report 2018. Accessed From:
https://www.lankahospitals.com/wp-content/uploads/2019/05/ar2018_compressed.pdf
Laurence, P., 2017. Quantitative modeling of derivative securities: from theory to practice.
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http://www.nawaloka.com/image/annual-report/pdf/Nawaloka_Hospitals_PLC_AR_2017-
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Suwanna, T., 2012. Impacts of dividend announcement on stock return. Procedia-Social and
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WSJ,2019. Stock market. Accessed From: https://www.wsj.com/news/markets