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CHAPTER 1

INTRODUCTION:

1.1 Background of the study:


The study of (Beaver, Kettler& Scholes, 1979) of the first empirical studies in this area , aimed
to measure the relationship between measures of systemic risk ( beta ) and seven metrics
accounting for the risk are: the proportion Distributed to net income , the percentage growth in
assets , leverage (the ratio of debt to assets ) , the current liquidity ratio , the average size of
assets , earnings variation ( standard deviation of the ratio of earnings to share price ) , the
proportion of the company's profits to the share price . Testing was conducted using the
relationship contributed to individually configure and investment portfolios for the first two
periods (1947-1956) and the second (1957-1965) in order to measure the ability to predict.
Study (Jahankhani&Lynge, 1980)

entitled : "Commercial bank financial-policies and their

Impact on market-determined measures of risk The study aimed to test the relationship between
systemic risk and the college and some of the indicators of accounting in the banking industry , I
have been using seven variables accounting are: ( dividends , leverage , the coefficient of
variation of deposits , the coefficient of variation of return on the stock , the proportion of
facilities for deposits , loan loss provision , and the liquidity ratio ) .
Study (Abd Al- Rahman , 1987 ) "The impact of change in the funding structure policies on the
profitability of the company "The aim of this study was to measure the effect of the change in the
funding structure on the profitability of the facility, was conducted on 12 companies from the
industrial public sector Arab Republic of Egypt , and it was the most important findings of the
study: that the average leverage ratio for the sample of the study was (47% ) which was broken
down as follows : the proportion of debt financing long-term (19%) and the proportion of shortterm debt (28 % ) , and the study concluded that the companies in which the debt ratio is higher
than the proportion of property rights were more likely to achieve the losses , which means that
the relationship was counterproductive between leverage and the rate of return on investment.

Some recent studies including Sheel (1994), Sunder and Myers (1999) and Wald (1999) have
corroborated these findings.
Fama and French (1998) reported that debt does not concede taxes benefits. The degree of
leverage tends to generate agency problems among shareholders and creditors that predict
negative relationships between leverage and profitability. Other studies that reported negative
relationships between leverage and profitability.

1.2 Objective of the Study:


The study would attempt to achieve the following main objectives

To find out the relationship of Leverage with Profitability.


To examine the impact of Leverage on Profitability.
To investigate the relationship between Dividend payout and Return on asset.
To find out the relationship between Dividend payout and Price earnings ratio.

1.3 Significance:
The role and impact of leverage on profitability on firm performance is very important for the
success and growth the firm. Qualitative and Quantitative research may be conducted in different
context and locality of Pakistan to see whether there exists an actual co-relation between
dividend payout and return on asset as well as the influence of price earnings ratio on dividend
payout to generalized the results in different context.

1.4 Research question


1. What is the relationship between leverage on profitability in textile sector of Pakistan?
2. What is the impact of leverage on profitability?
3. How we can empirically evaluate the relationship between Dividend payout and Return on

asset?
4. What is the impact of Dividend payout and Price earnings ratio?

1.5Limitation of the study

Lack of time
Lack of resources
Less availability of data

1.6Scope of the study


The study of this research is focused only on Textile sector listed on Karachi stock exchange
(KSE). Further 15 companies from the sector are being selected for 5 years (2011-2015). The
study focused on the variables; Dependent: Dividend payout ratio , Independent: Return on Asset
(ROA), Price Earnings Ratio(PER), Earnings Per Share(EPR), Current Ratio(CR), Quick
Ratio(QR), Debt to Equity (DTE) and Debt to Total Assets (DTTA)

1.7 Scheme of the study


This study is structured as follow: the second section of the study deals with the brief review of
important empirical and theoretical literature on the effects of leverage on profitability. The third
and fourth sections of this paper provide the methodology and framework of the research
includes sampling and variables etc. In fourth section discuss the data analysis, discussion. Final
section of the paper provides the conclusion.

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