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 types
1. 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 9612.95
2002-03 10369.53
2003-04 9398.38

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2004-05 9211
2005-06 9790.01
2006-07 10846.88
2007-08 15445.24
2008-09 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 CAPITAL
Working 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. Inventories
2. Sundry Debtors
3. Loans and advances
4. Cash and Bank Balance
CURRENT LIABILITIES:
It includes
1. Liabilities
2. 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 2007-08
Working 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 2005-06
Working capital=Current assests – current liabilities=22,324.13-14,085.16=8,238.97 million.
For 2004-05
Working 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:
INFOSYS
TOYOTA MOTOR CORPORATION
NORTEL 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. STERLITE
2. TATA COMMUNICATIONS
3. WIPRO
4. INFOSYS TECHNOLOGIES
5. HDFC BANK
6. ICICI BANK
7. DR.REDDY’S LABS
8. TATA MOTORS
9. SIFY
10. MAHINDRA SATYAM
11. PATNI SOLUTIONS
12. 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 PHARMA
2. HOTEL LEELA
3. ORCHID CHEMICALS
4. TATA MOTORS

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 5. BHARAT FORGE
6. SUZLON ENERGY
7. AMTEK AUTO
8. RANBAXY
9. HDFC
10. 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$ million

2. INFOSYS – Issued on 11 Mar 99 US 70.38$ million

3. MAHINDRA & MAHINDRA – Issued on 30 Nov 93 – US 74.75$ million

4. ITC – Issued on 13 Oct 93 – US 68.85$ million
5. SAIL – Issued on 7 Mar 06 – US 125$ million
6. ICICI – Issued on 22Sep 99 – US 315$ million
7. IPCL – Issued on 08 Dec 94 – US 85$ million

8. INDIA CEMENTS – Issued on 11 Oct 94 – US 90$ million

9. CROMPTON GREAVES – Issued on 02 Jul 96 – US 50$ million

10. Dr REDDYS – Issued on 18 July 94 – US 48$ million

11. FLEX INDUSTRIES – Issued on 30 Nov 95 – US 30$ million

12. GAIL – Issued on 04 Nov 99 – US 22.50$ million

13. G.E SHIPPING – Issued on 17 Feb 94 – US 100$ million

14. GARDEN SILK – Issued on 04 Mar 94 – US 45$ million

15. EID PARRY – Issued on 07 Jul 94 – US 40$ million.

3)CAPITAL STRUCTURE THEORIES:

They are
1) TRADITIONAL POSITION
2) MODIGLIANI AND MILLER POSITION
3) RISK RETURN TRADE – OFF’S
4) SIGNALING THEORY

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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
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

ROR

MODIGLIANI AND MILLER POSITION

PERFECT 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.
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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/r
II. 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 about
The expected return on asset is:-
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.

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4.RELEVANCE OF ALL THEORIES TO PRACTICAL PURPOSES
Article 1
An 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 2
An 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
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 3
An 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 4
The 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 5
This 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 6
Romanian 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 7
This 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 8
In 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

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simulation model states that the farm business can expand at a moderate speed if it has good financial
position.
Article 9
This 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 10
Using 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
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 11
The 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 12
The 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 13
The 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 14
This 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 15
This 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 16
This 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 17
This 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.

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Article 18
This 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 19
This 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
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 21
This 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 22
This 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 23
This 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 24
The 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 25
Modigliani 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

11
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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