Abstract

The study meant to explore the external and internal factors which influence the firms profitability. Data has extracted from Balance Sheet Analysis of Joint Stock Companies Listed on The Karachi Stock Exchange from 2001-2010 By using Regression analysis technique result has found which represent that all three independent factor i.e. taxes, dividends and firms expenses are significant with Net income before tax (NIBT).In this research Net income before tax (NIBT) has taken as profitability measure and their dependency has checked with taxes, dividends and firms expenses.

Problem statement:
Facing economic crises internationally and imposing high level of taxes having an unresponsive impact on manufacturing industry. Firms profit is going down because of raising the cost which is increasing by imposing the taxes and fluctuation of exchange rate that is directly effect firms profit. Reason is that, if the payment become in shape of dollars ($) it become very difficult to survive in the market. Operating expenses is increasing, industry facing a problem to make a dividend policy. The perception of the Government is that, by increasing the tax on every single item is the solution to sustain in future. If the situation remains same it would be difficult to reach the specific task. There are three possible sources of market failure. 1) Because of higher production of pollution externality, 2) The appropriate durability level due to manufacturers, the market power and 3) Production due to selection, these three potential sources of market failure life of a specific level of service not to provide minimum social cost.

Research Question:
What are the impact of taxes, dividend and expenses on the firms profitability?

Objective:

Objective of this research to analyze the impact of taxes, dividends and expenses on the firms profitability.

DATA of Hino Pak from 2001 to 2010:

obs 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 PRO 24.03 25.9 28.4 27.07 25.95 26.12 27.58 25 15 13.94 TAX 0.34 0.35 0.35 0.35 0.35 0.35 0.35 0.35 0.36 0.37 DIVI 0.021 0.0229 0.024 0.0202 0.0205 0.0202 0.0252 0.0247 0.0152 0.0196 EX 0.0619 0.0597 0.0578 0.0583 0.0595 0.0603 0.0607 0.06204 0.0657 0.0682

Purpose of the study:

The purpose of this study is to examine taxes, dividends and expense affects on profit by making the strategies and minor importance and knowledge of companies that produced guidelines effectively the current and future implication against competitors which leads to a better competition environment therefore the whole industry will be beneficiary. Policies controls and predict the upcoming circumstances of the private limited industry.

Scope :
After observing the results we would be able to predict the accurate growth or turn down picture of the private limited industry and also able to define the dependency of manufacturing on the implementation of the taxes, expenses and dividend.

Limitations:
This research analyze the taxes, dividend and expenses effect on firms profitability, other determinates of firm profitability has been ignored due to time constrained. This study only consists on ten (10) year data.

Delimitations:

This research does not analysis location (country) effect on firm profitably; since the research is base on the firm in Pakistan therefore this factor has not been considered.

Theoretical Background:
The theoretical analysis shows that tax rates abroad impact the cost of capital in the existence of profit shifting behavior. The respective size of investment should theoretically increase with a decreasing tax rate at a foreign affiliate, towards which profits are shifted. High level of business tax, but relatively low corporate tax revenue is also documented. Companies have a higher rate in which includes a corporate income tax and a local business tax is charged. Legal tax rate increase in benefits instead of the activities of multinational profit from changes. It is an appropriate and authentic way to shift profit by taking decision of low tax location on firm financing. First is the appropriate debt obligation does a multinational company in terms of international tax difference is appropriated. So, taxable income is reduced from interest deductions. As a result, control of command lose the business tax profits and accordingly try to secure their tax base system. From a theoretical point of view can be expected, however, highly taxed countries in the level of investment which increased tax competition may adversely impact on profits. In particular, even more tax benefits from tax positions' multinational real volume of investment have shifted the question of influence analysis. Tax and transfer pricing planning activities through intercompany loans received more attention because in many countries offer favorable conditions by shifting profits to reduce tax burden is used. Possession of the firm is less concentrated to increase dividends while profitability increases and expected additionally to leave out the dividends when the opportunities of investments improved. The main factor of the manufacturing firms is fully provided the productivity which creates the profitability maximization. For this purpose manufacturing cost dominate the operating expenses. Expenses may be technically, advertising the productivity which creates the multiple benefits that provide the maximum output in the current and future period. In addition, computing profitability is measured as return on equity and wealth, with this assumption we bound that operating profits measures income generated by assets in place.

Research Approach- Quantitative:

There are two types of research approach quantitative & qualitative approach. In quantitative research approach is commonly linked through the positivist/post positivist model. It generally involves collect and converts data into numerical form so that statistical calculations can be made and conclusion drawn. In qualitative research approach approach is generally connected through the public constructivist paradigm which emphasize the socially build the nature of truth. It is regarding analyze and attempt to expose the meaning and importance of human behavior and experience, together with opposing emotions, beliefs and behaviors. In this study we are using quantitative approach.

3.2 Correlational Research:

If researchers are interested the correlational effects of one variable on another, for the enhancement of their study they apply an experimental. By a trial plan, if irrelevant variables occur the investigator can manage it. In experimental designs there are two variables, one is called the independent variable and the other is called the dependent variable .The independent variable is the predictor variable while the dependent variable is the outcome variable. Investigator manipulates and controls the independent variable for the analyzing the effect of dependent variable. Multiple regression analysis is used to perform the test because Hypothesis shows the dependency of variables i.e. corporate tax, income tax, taxes on international trades and fluctuation of exchange rate depends on the firms profitability. The model developed and applied for Pakistan.

3.3 Multiple Regression:

Multiple regression analysis is used to perform this test, because Hypothesis is a nature of interdependency of variables and the variables become numeric.

3.5 Research Model:

Model that contain the dependent and explanatory are

Pro = 1+ 2Tax + 3DIVI + 4Ex +

Where,

Pro = Net income 1 = Constant 2= Co efficient of Tax 3= Co efficient of Dividend 4= Co efficient of Expense

= Error
3.5 Hypothesis:
Ho: Tax, dividends and expense has an insignificant impact on firm profitability in Pakistan. H1: Tax, dividends and expense has a significant impact on firm profitability in Pakistan.

3.6 Data Source:

Secondary data is required for the research which is Karachi stock exchange listed firms profit, assets and sales. The data is taken from the Balance Sheet Analysis of Hino Pak Companies, year of 2001-2010 which is state bank of Pakistan publications and it represent ten year financial statements of the firms. For the purpose this study

Variable Description
Taxes: An involuntary fee levied on corporations or individuals that is enforced by a level of government in order to finance government activities. Dividends: Dividends are the distribution of a company's gains over a fixed period of time to shareholders. This disbursement of capital is done so under the authority of the board of directors. Dividends are issued on a per share basis and is called a per share dividend. Expense: Any cost of doing business resulting from revenue-generating activities

1 Descriptive Statistics:
Descriptive statistics shows summary of the data use in study and by the help of this one can easily understand the range and features of the data.
Mean Median Maximum Minimum Std. Dev. Skewness Kurtosis Jarque-Bera Probability Sum Sum Sq. Dev. Observations PRO TAX 23.899 25.925 28.4 13.94 5.127385 -1.29512 3.01209 2.795621 0.247137 238.99 236.6107 10 0.352 0.35 0.37 0.34 0.006888 1.088135 4.182857 DIVI 0.02135 0.02075 0.0252 0.0152 0.002979 0.552578 2.893536 EX 0.061414 0.0605 0.0682 0.0578 0.003269 1.007433 2.970612

2.517614 0.513627 1.691896 0.283993 0.773512 0.42915 3.52 0.00056 10 0.2135 7.98E-05 10 0.61414 9.62E-05 10

Correlation matrix
PRO PRO TAX DIVI EX 1 -0.79526 0.706128 -0.95181 TAX -0.795257 1 -0.43981 0.748624 DIVI EX 0.706128 -0.95181 -0.43981 0.748624 1 -0.5113 0.511295 1

Least squire method

Dependent Variable: PRO Method: Least Squares Date: 05/12/12 Time: 17:26 Sample: 2001 2010 Included observations: 10 Variable C TAX DIVI EX Coefficient Std. Error 114.7162 -98.2245 491.4441 -1086.63 15.9364 55.30479 112.9913 139.4721 t-Statistic 7.198375 -1.776058 4.349398 -7.791047 Prob. 0.0004 0.0261 0.0048 0.0002

R-squared Adjusted R-squared S.E. of regression Sum squared resid Log likelihood Durbin-Watson stat

Mean dependent 0.981099 var 0.971649 S.D. dependent var 0.863335 Akaike info criterion 4.472084 Schwarz criterion -10.1657 F-statistic 0.953658 Prob(F-statistic)

23.899 5.127385 2.833147 2.954181 103.8167 0.000015

5.1 Conclusion:

In conclusion, we find that firms past and future profitability and variability are essential in identify the exact entrance point at which firms proficiency value fluctuations from the corporate tax rate change, dividends and expenses which show the impact of firms profitability. This research addresses a primary query in changes in firm assessment triggered by Hypothetical corporate tax rate changes. It is calculated in this study the effects that these tax rate changes forced on firms valuation using simulated future paths of taxable income and the assumed alternative hypothetical statutory tax rates. Corporate tax rate changes can improve the stock price but it has a negative impact on the firms profitability. The study use multi regressions of firm value on earnings, investment and financing variables to measure tax effects in the pricing of dividend and debt. The study finds that the relationship between dividend and firm value is positive. The positive relationship between dividend and value involve that dividend express information about expected profitability that is also in earnings and savings. Accounting rules visibly specify that

operating expenses are expenses calculated to create income in the existing period, while capital expenditures are considered to provide profit over multiple periods. Even though the importance of expenses e.g. (advertising exp, selling exp, R&D exp) have been recognized by the literature and it examined the outcome of these expenses have a positively connected with profit margins.

5.2 Recommendation:
If the study control for the information about profitability in debt, the debt slopes in the shared multi regressions should identify tax effects, expenses and dividend also. Need for government to reduce the level of personal income tax and company income tax further to encourage firms to plough back their profits into profitable investment opportunities. The prevailing interest rate on debt is on the high side, apart from the fact that firms are often discriminated against in lending, the lending rate is also discouraging firms from seeking debt financing. Adoption of a dividend policy should be strictly considered based on the unique circumstances of the bank and not necessarily based on age long traditional factors often formulated by academics. This is essential in order to maintain a steady and reasonable policy. For external and internal growth strategies not only the consider on advertising expense to increase the selling effort and it must be included in the analysis along with other determinants.

5.3 Future recommendation:

Government should therefore pursue sectoral allocation of credit in favour of manufacturing firms. This will enable firms take advantage of the tax benefit from debt financing. Consideration should be given to the needs and expectation of the shareholders in Stream lining a dividend policy. When shareholders are akin to tax saving or minimizing tax liability, it is

reasonable to consider policies that allows for tax savings such as scrip dividends. External growth strategies including mergers, acquisition and joint ventures should be used along the expenses to increase the firms profitability.