COMPANY BACKGROUND:Ashok Leyland is a commercial vehicle manufacturing company based in Chennai, India. It is the second largest commercial vehicle company in India in the medium and heavy commercial vehicle (M&HCV) segment with a market share of 28% (2007-08).Ashok Leyland is a market leader in the bus segment.The company was established in 1948 as Ashok Motors, with an aim to assemble Austin cars. Manufacturing of commercial vehicles was started in 1955 with equity contribution from the British company, Leyland Motors. Today the Company is the flagship of the Hinduja Group, a British-based and Indian originated transnational conglomerate.Ashok Leyland is a technology leader in the commercial vehicles sector of India. Its annual turnover exceeded USD 2 billion in 2007-08. Selling close to around 83,000 medium and heavy vehicles in 2007-08, Ashok Leyland is India's largest exporter of medium and heavy duty trucks out of India. It is also one of the largest Private Sector Employers in India - with about 12,000 employees working in 6 factories and offices spread over the length and breadth of India

Ashok Leyland also had a collaboration with Hino Motors, Japan from whom the technology for the H-series engines was bought. Many indigenous versions of H-series engine was developed with 4 and 6 cylinder and also conforming to BS2 and BS3 emission norms in India. These engines proved to be extremely popular with the customers primarily for their excellent fuel efficiency. Most current models of Ashok Leyland come with H-series engines.In the journey towards global standards of quality, Ashok Leyland reached a major milestone in 1993 when it became the first in India's automobile history to win the ISO 9002 certification. The more comprehensive ISO 9001 certification came in 1994, QS 9000 in 1998 and ISO 14001 certification for all vehicle manufacturing units in 2002. In 2006, Ashok Leyland became the first automobile company in India to receive the TS16949 Corporate Certification.

FINANCE FUNCTION OF COMPANY:Finance function is the life board of any company so the management puts special attention towards it. A firm performs finance function efficiently so that the business goes on smoothly and interruption and the company remains not only able to grow on its own resources generated through surpluses. Finance function call for skill planning control and execution of s firm’s activities.Following are the three major decisions as function of finance1.The Investment decision. 2.The Financing decision.3.The Dividend policy decision.DIVIDEND DECISION:Dividend decision is the third major financial decision. The financial manager must decide whether the firm should distribute all profits, or retain them, or distribute a portion & retain the balance. The optimum dividend policy is one that maximizes the market value of the firm’s shares.Dividends are paid to the share holders of the company.It is of 2 types1. In-Terim Dividend

It is distributed before the company’s annual earnings.2. Final Dividend.

It is declared at the company’s Annual general meeting for any given year.

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DIVIDENDS GIVEN:1. For the Year 2001-02 the directors recommend the dividend of 45% i.e. Rs.4.50/- per

equity share and the tax is deducted.2. For the Year 2002-03 the directors recommend the dividend of 50% i.e. Rs.5/- per equity

share of Rs.10/-3. For the Year 2003-04 the directors recommend the dividend of 75% i.e. Rs.7.50/- per

equity share of Rs.10/-.4. For the Year 2004-05 the directors recommend the dividend of 100% i.e. Rs.1.00/- per

equity share of Rs.1/-.5. For the Year 2005-06 the directors recommend the dividend of 120% i.e. Rs.1.20/- per

equity share of Rs.1/-.6. For the Year 2006-07 the directors recommend the Final dividend of 75% i.e. Rs.7.50/-

per equity share of Rs.1/-.7. For the year 2007-08 the company has given Interim dividend of 150% i.e. Rs.1.50/- per

equity share of Rs.1/-.8. For the Year 2008-09 the company has given a dividend of 100% (Re.1 for equity share

of Re.1

FINANCING DECISION: Financing decision is the second important function to be performed by the financial manager. Broadly, he or she must decide when, where & how to acquire funds to meet the firm’s investment needs. In practice, a firm considers many other factors such as control, flexibility, loan covenants, legal aspects etc. in deciding its capital structure. INVESTMENT DECISION:The investment decision relates to the selection of assets in which funds will be invested by a firm > the assets that can be acquired fall into two broad groupsI.Long term or Fixed assets II.Short term or Current assets The financial manager has to carefully allocate the available funds to recover not only the cost of the fund but also must earned sufficient return on the investment. Two important aspects of the investment decision are: a)The evolution of the prospective return of new investmentb)The measurement of cut off rate against that prospective return of new investment could be compared. Investment proposal should be evaluated in term of both expected and risk.Investment is of 2 types

Long-term Investment Short-term Investment

LONG - TERM INVESTMENT:It means that doing the payment now and getting benefit after 3,5,8 years later. Ex: Plant & Machinery.FIXED ASSETS:

YEAR AMOUNT(Million)2001-02 9612.952002-03 10369.532003-04 9398.38

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2004-05 92112005-06 9790.012006-07 10846.882007-08 15445.242008-09 43974.054

GROWTH OF THE COMPANY:ORGANIC GROWTH:The Company is growing on its own i.e. Step – by – Step.The company’s annual turnover is increasing year by year by increasing the capacity of the vehicles by 105,000 per annum.INORGANIC GROWTH : It is done with Mergers and Acquisitions.

It has acquired Avia Truck Business Unit on Oct 17 2006. It acquired truck business unit of Czech capital, with an annual production capacity of

20,000 vehicles on July 19 2006. It is having a multi million plant in Iran for CNG Trucks and Buses. It has partnership with Nissan both are agreed with Japan based Nissan Motor Co for

manufacturing and sale of light vehicles and power trains on July 19 2006.SHORT- TERM INVESTMENT:It mainly deals with Current Assets and Current Liabilities.The Current Asset for the year 2001-02 is Rs.15634 million and Current Liability is Rs.5411.15 million.For the year 2008-09 Current Asset is Rs.31656.157 million and current liability is Rs.21369.458 million.WORKING CAPITALWorking capital mainly deals with current assets and current liabilities. It is also called as day-to-day expenditure.Working Capital=Current Assets – Current Liabilities.It may be Positive or Negative. CURRENT ASSETS:It includes

1. Inventories2. Sundry Debtors3. Loans and advances4. Cash and Bank Balance

CURRENT LIABILITIES:It includes

1. Liabilities2. Provisions

Working Capital decisions are done according to the demand in the market.For 2008-09 Working capital=Current assests – current liabilities=31,656.157-21,369.458=10,286.699 million.For 2007-08Working capital=Current assests – current liabilities=28,752.581-22,719.393=6033.1 million.For 2006-07

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Working capital=Current assests – current liabilities=26,977.14-17,558.55=9,418.59 million.For 2005-06Working capital=Current assests – current liabilities=22,324.13-14,085.16=8,238.97 million.For 2004-05Working capital=Current assests – current liabilities=21,572.63-11,656.67=9,915.96 million.

Major Milestone 1966 Introduced full air brakes 1967 Launched double-decker bus 1968 Offered power steering in commercial vehicles 1979 Introduced multi-axle trucks 1980 Introduced the international concept of integral bus with air suspension 1982 Introduced vestibule bus 1992 Won self-certification status for defence supplies 1992 Launched vestibule buses 1993 Received ISO 9002 1997 India's first CNG powered bus joined the BEST fleet 2001 Received ISO 14001 certification for all manufacturing units 2002 Launched hybrid electric vehicle

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2.) CONCEPT OF AMERICAN DEPOSITORY SHARE, AMERICAN DEPOSITORY RECEIPT, FOREIGN CURRENCY CONVERTIBLE BONDS, GLOBAL DEPOSITORY RECEIPTS WITH REFERENCE TO 10 INDIAN COMPANIES

1. ADS (AMERICAN DEPOSITORY SHARE):It is a way for the companies to list the normal equities in the American Stock Exchange such as “NASDAQ”. It is issued by the depository banks in the U.S under the agreement of the foreign companies. It represents the foreign shares of the company held on deposit by a custodian bank in the company¹s home country and carries the corporate and economic rights of the foreign shares, subject to the terms specified on the ADR certificate.

EXAMPLES:INFOSYSTOYOTA MOTOR CORPORATIONNORTEL INVERSORA

2. ADR (AMERICAN DEPOSITORY RECEIPT):It is the certificate given by the US bank representing a specified number of shares in a foreign stock that is traded on a US Exchange. It helps to reduce the administration and duty costs that would otherwise levied on each transaction. It can be listed either on NYSE or NASDAQ.

EXAMPLES:1. STERLITE2. TATA COMMUNICATIONS3. WIPRO4. INFOSYS TECHNOLOGIES5. HDFC BANK6. ICICI BANK7. DR.REDDY’S LABS8. TATA MOTORS9. SIFY10. MAHINDRA SATYAM11. PATNI SOLUTIONS12. MAHANAGAR TELEPHONE NIGAM LTD (MTNL)13. REDDIF

3. FCCB (FOREIGN CURRENCY CONVERTIBLE BOND):The issuing company raises money in the form of foreign currency. It is a mix between a debt and equity instrument. It acts like a bond by making regular coupon and principal payments, but these bonds also give the bondholder the option to convert the bond into stock. These types are attractable for both the investors and the issuers. The investors receive the safety of guaranteed payments on the bond and are also able to take advantage of any large price appreciation in the company's stock. EXAMPLES:

1. AUROBINDO PHARMA2. HOTEL LEELA3. ORCHID CHEMICALS4. TATA MOTORS

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5. BHARAT FORGE6. SUZLON ENERGY7. AMTEK AUTO8. RANBAXY9. HDFC10. MAHINDRA & MAHINDRA

4. GDR (GLOBAL DEPOSITORY RECEIPTS):A bank certificate issued in more than one country for shares in a foreign company. The shares are held by a foreign branch of an international bank. The shares trade as domestic shares, but are offered for sale globally through the various bank branches.

EXAMPLES:1. ASHOK LEYLAND – Issued on 20Mar 95 – US 137.77$ million2. INFOSYS – Issued on 11 Mar 99 US 70.38$ million

3. MAHINDRA & MAHINDRA – Issued on 30 Nov 93 – US 74.75$ million4. ITC – Issued on 13 Oct 93 – US 68.85$ million5. SAIL – Issued on 7 Mar 06 – US 125$ million6. ICICI – Issued on 22Sep 99 – US 315$ million7. IPCL – Issued on 08 Dec 94 – US 85$ million8. INDIA CEMENTS – Issued on 11 Oct 94 – US 90$ million9. CROMPTON GREAVES – Issued on 02 Jul 96 – US 50$ million10. Dr REDDYS – Issued on 18 July 94 – US 48$ million11. FLEX INDUSTRIES – Issued on 30 Nov 95 – US 30$ million12. GAIL – Issued on 04 Nov 99 – US 22.50$ million13. G.E SHIPPING – Issued on 17 Feb 94 – US 100$ million14. GARDEN SILK – Issued on 04 Mar 94 – US 45$ million15. EID PARRY – Issued on 07 Jul 94 – US 40$ million.

3)CAPITAL STRUCTURE THEORIES:They are

1) TRADITIONAL POSITION2) MODIGLIANI AND MILLER POSITION3) RISK RETURN TRADE – OFF’S4) SIGNALING THEORY

TRADITIONAL POSITION THEORY:The Main proposition of the traditional approach is:-1. The cost of debt capital, rd, remains more or less constant up to a certain degree of leverage but rises thereafter at an increasing rate.2. The cost of equity capital, re, remains more or less constant or rises only gradually up to a certain degree of leverage and rises sharply thereafter.3. The average cost of capital, ra, as consequence of the above behaviors of re and rd,

I. Decrease up to a certain point.II. Remains more or less unchanged for moderate increases in leverage thereafter

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III. Rises beyond a certain point.The traditional approach is not as sharply defined as the net income approach or the net operating income approach. Several sharps of rd, re and ra are consistent with this approach. Graphically

MODIGLIANI AND MILLER POSITIONPERFECT CAPITAL MARKET: Information is freely available and there is no problem of asymmetric information; transactions are costless; there are no bankruptcy costs; securities are infinitely divisible.RATIONAL INVESTORS AND MANGERS: Investors rationally choose a combination of risk and return that is most advantageous to them. Managers act in the interest of shareholders.HOMOGENEOUS EXPECTATION:Investors hold identical expectations about future operating earnings.EQUIVALENT RISK CLASSES: Firms can be grouped into ‘Equivalent Risk Analysis’ on the basis of their business risk.ABSENCE OF TAXES: There is no tax.

PROPOSITION:I. MM’S FIRST PROPOSITION:“The value of a firm is equal to its expected operating income divided by the discount rate appropriate to its risk class. It is independent of its capital structure.”V=D+E=O/rII. An increase in financial leverage increases the expected earnings per share but not the share price. Why? The answer is that the change in the expected earnings is offset by a corresponding change in the return required by the shareholders. Let us see how this comes aboutThe expected return on asset is:-

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ROR

D/E

re

ra

rd

ra=[D/D+E]rd+[E/D+E]re

THE TRADE OFF MODEL:-The trade off models cannot be used to specify a precise optimal capital structure, but they do enable us to make three statements about leverage:1. Firms with more risk ought to use less debt than lower risk firms, other things being equal,because the greater the business risk, the greater the probability of financial distress at any level of debt, hence the greater the expected cost of distress. Thus, firms with lower business risk can borrow more before the expected costs of distress offset the tax advantage of borrowing.2.Firms that have tangible, readily marketable assets such as real estate can use more debt that firms whose value is derived primarily from tangible assets such patents and goodwill. Specialized assets and intangible assets are more likely to lose value if financial distress occurs are standardized, tangible assets.3. Firms that are currently paying taxes at the highest rate, and that are likely to do so in the future, should use more debt than firms with lower tax rates. High corporate taxes lead to greater benefits from debt, other factors helps constant, so more debt can be used before the tax shield is offset by financial distress and agency costs.According to the trade-off models, each firm should set its target capital structure such that the costs and benefits of leverage are balanced at the margin, because such a structure will maximize its value. If trade off models is correct, we should find the actual target, structure that are consistent with three points just noted.THE SIGNALING THEORY:-Some years ago, Professor Gordon Donaldson of Harvard conducted an extensive study of how corporation actually establish their capital structure. Here is a summary of his findings:-1. Firms prefer to finance with internally generated funds, that is, with retained earnings and depreciation cash flow.2. Firms set target dividend payout rations based on expected future invested opportunities and expected future cash flows. The target payout ratio is set at a level that causes retained earnings plus depreciation to cover capital expenditure under normal conditions.3 Dividends are “sticky” in the short run-firms are reluctant to raise dividends unless they are confident that the higher dividend can be maintained, and they are especially reluctant to cut the dividend. Indeed, they generally do not reduce the dividend unless things are so bad that they simply have to.

4.RELEVANCE OF ALL THEORIES TO PRACTICAL PURPOSESArticle 1An analysis of determinants of Capital Structure of 104 Swiss Companies show that the size of companies and the importance of tangible assets are positively related to leverage, while growth and profitability are negatively associated with leverage. The sign of these relations suggest that both the pecking order and trade-off theories are at work in explaining the capital structure of Swiss companies, although more evidence exists to validate the latter theory.Article 2An equilibrium model is developed in which informational asymmetries about the qualities of products offered for sale are resolved through a mechanism which combines the signaling theory and costly screening approaches. The model is developed in the context of a capital market setting in which

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bondholders produce costly information about a firm's a priori imperfectly known earnings distribution and use this information in specifying a bond valuation schedule to the firm.Article 3An agency problem, a signalling problem and an agency-signalling problem arise as special cases. In the agency-signalling equilibrium the private information of corporate insiders at the time of financing is signalled through capital structure choices which deviate optimally from agency-cost minimizing financing arrangements, which in turn induce risk-shifting incentives in the investment policy. In the pure signalling cue the equilibrium is characterized by direct contractual precommitments to implement investment policies which are riskier than pareto-optimal levels.Article 4The Modigliani-Miller theorem on the irrelevancy of financial structure implicitly assumes that the market possesses full information about the activities of firms. If managers possess inside information, however, then the choice of a managerial incentive schedule and of a financial structure signals information to the market, and in competitive equilibrium the inferences drawn from the signals will be validated.Article 5This article investigates determinants of capital structure, focusing on tax incentives for debt. The results demonstrate a significant tax coefficient during the classical era and an insignificant tax coefficient in the imputation era. Risk and signalling variables, represented by firm size, Z-score, operating risk and asset base are also found to help explain capital structure choice.Article 6Romanian listed companies finance their assets, through equity, commercial debt and other financial debt.Pecking order theory seems to be more appropriate for the Romanian capital market, but signalling theory is not entirely rejected.Article 7This abstract examine the determinants of the debt maturity structure of French, German and British firms, the factors that represent three major theories are (tax consideration. liquidity and signaling and contracting cost.Article 8In this abstract a multi-period simulation model is developed based on the capital structure theories. This model reflects both conceptual and empirical implications of the pecking order, trade off, and signaling theories. It is mainly used on farm business in - Financing, Investment, and Expansion Process. The simulation model states that the farm business can expand at a moderate speed if it has good financial position.Article 9This abstract talk about the role of the bank in the 1997 crisis. It talks about the capital adequacy, liquidity, profitability, loan preference, bank asset, net income administrative expenses. This abstract says that during financial liberalization, loan preference ratios were signaling more risk. When capital adequacy falls, management size increases, but in this case profitability behaves appositely indicating diminishing returns.Article 10Using panel data for the period 1999-2003, this study shows that internal and external financing are not perfect substitutes, not corroborating the theorem of Modigliani and Miller. Portuguese service

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industries prefer internal to external financing, corroborating Pecking Order theory. The bigger the size of the company, the greater the level of debt, corroborating Trade-Off and Signalling theories.Article 11The capital structure theory based on option pricing model is an important embranchment, which connects the capital structure theory with its most essential issue, debt and equity pricing. The paper reviews capital structure theory based on option pricing model, and proposes future research direction.Article 12The motivation of this paper is that information problems and other market imperfections, which explain the business group phenomenon of firm ownership structure in emerging markets, also underpin mainstream theories of firm leverage.Article 13The main objective of this paper is to investigate which of the two competing capital structure theories – the pecking order of financing choices or the traditional static trade-off model – better describes the financing decisions in Polish companies traded on the Warsaw Stock Exchange (WSE).Article 14This paper examines optimal capital structure choice using a dynamic capital structure model that is calibrated to reflect actual firm characteristics. Using this model, we calculate optimal capital structures in a realistic representation of the traditional trade-off model.Article 15This article examines the optimal mixture and priority structure of bank and market debt using a trade-off model in which banks have the unique ability to renegotiate outside formal bankruptcy. Flexible bank debt offers a superior trade-off between tax shields and bankruptcy costs.Article 16This article evaluate the association between the pace of the adjustment toward target capital structure and the extent to which equity prices reflect firm-specific information and also shows that the financing decisions of most Taiwanese firms support trade off theory. The findings suggest that firm-specific stock return variation provides considerable insight to capital structure decisions.Article 17This paper explores the empirical implications of the observation that firms adjust their capital structure infrequently using a calibrated dynamic trade-off model to simulate firms' capital structure paths and that, in a dynamic economy the leverage of most firms is likely to differ from the optimum leverage at the time of readjustment.Article 18This paper investigates determinants of capital structure in 308 UK real estate companies. By using panel data regression we find the significant factors influencing the capital structure of the selected companies.Article 19This study attempts to model the practice of capital structure decisions according to the basic premises of each theory of capital structure: trade-off theory, pecking-order theory and free cash flow theory. The methodology addresses modeling long-term and short-term debt financing decisions based on ten different statistical criteria using data from Egypt stock market.Article 20

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This article focuses on the Modigliani – Miller approach analyzing the right mix of debt and equity in a company and the effect of paying dividends on corporate value. Brief biographical information and career highlights for the two economists are included.Article 21This paper investigates the consequences of the firms' financial decisions in the framework of a perfectly competitive general equilibrium model with incomplete markets. When markets are complete or there are no derivative securities (such as options, forwards or futures) written on the firms' shares, these decisions are irrelevant. This result reaffirms and qualifies the original claim by Modigliani and Miller.Article 22This paper provides further evidence on the relationship between a firm's capital structure and its labour demand estimating dynamic labour demand equations using firm-level panel data for firms in the electronics sector in Ireland for the period 1982 to 1995. The results suggest that labour demand is not affected by a firm's capital structure, proxied by its debt-to-asset ratio giving statistical support to the Modigliani–Miller theorem, which conjectures that the market value of a firm is not influenced by its capital structure, implying that a firm's labour demand decision is independent of capital structure.Article 23This article explains why it is wrong to assume that capital structure does not matter in a company's performance. Examples of how capital structure can have important implications on a company; a central aspect of a company's financial policy being its choice of capital structure, particularly the extent of its relative reliance on debt and equity; faults in the Modigliani and Miller propositions; When capital structure matters.Article 24The objective of this article is to foster research on the relationship between capital structure and corporate performance with hotel companies. Using data collected from 43 UK quoted organisations which possess an interest in owning and managing hotels, Modigliani and Miller's (1958) capital structure irrelevancy theorem is tested. Empirical analysis revealed no significant relationship between the level of debt found in the capital structure and financial performance.Article 25Modigliani and Miller show that, in perfect capital markets, the optimal investment decisions of a firm are not affected by how these investments are financed. Miller and Modigliani further imply that, under the assumption of perfect capital markets, a firm's investment decisions are not affected by its dividend decisions, although dividend decisions may or may not be influenced by investment decisions. This paper tests for linear and nonlinear causality between dividends and investments using both firm-specific and aggregate data for a sample of 417 firms over the 1962 to 2004 period.

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