Dr. V. N. Bedekar Institute Of Management Studies - RESEARCH … · 2014. 7. 26. · Dr. V. N. Bedekar Institute of Management Studies, Thane DR VN BRIMS. Monograph-Trends in Finance

RESEARCH MONOGRAPH

Trends In Finance

Seminar On: 7 th Feb 2015

Vidya Prasarak Mandal’s

Dr. V. N. Bedekar Institute of Management Studies, Thane DR VN BRIMS

Monograph-Trends in Finance Page 2

We, as a team for monograph publication on Trends in finance wholeheartedly

acknowledge the support and valuable contributions of all, those who have directly or

indirectly provided inputs in different forms for this publication

Dr. P .M. Kelkar, Dean, DR V N BRIMS

Mr. Nityanand Bhangale, Nomura Services India Ltd

Mr. Ashwinikumar Sharm , Ex-Deputy MD,SBI

Mr. Sandip Bhavsar, Librarian, D R V N BRIMS

Ms. Dipali Hindalekar, Library Assistant , DR V N BRIMS

Ms. Ketki Mistry, DR V N BRIMS

Editorial Team:

Dr. Amit Oak, Director, DR V N BRIMS

Dr.Guruprasad Murthy, Director General, DR V N BRIMS

Ms Smita Jape, Assistant Professor, DR V N BRIMS

Mr.Pushkar Parulekar Assistant Professor, DR V N BRIMS

Ms.Suman Mathur, Assistant Professor, DR V N BRIMS

ACKNOWLEDGEMENT


Dr. Amit Oak, Director, DR V N BRIMS ........................................................................................ 2

Dr.Guruprasad Murthy, Director General, DR V N BRIMS ........................................................... 2

Ms Smita Jape, Assistant Professor, DR V N BRIMS ..................................................................... 2

Mr.Pushkar Parulekar Assistant Professor, DR V N BRIMS .......................................................... 2

Ms.Suman Mathur, Assistant Professor, DR V N BRIMS .............................................................. 2

1-GENESIS, TRENDS IN FINANCE .......................................................................................... 11 2-PROLOGUE .............................................................................................................................. 16

2.1 MAXIMISING SHAREHOLDERS WEALTH .................................................................. 18

2.2 OPTIONS TO IMPROVE ROI ........................................................................................... 20

2.3 IMPROVE ROI - INCREASED SALES ............................................................................ 20

2.4 IMPROVE ROI - COST MANAGEMENT ........................................................................ 21

2.5 FINANCIAL EPISODES, EVENTS AND EXPERIENCES ............................................. 27

2.6 IRRATIONAL EXUBERANCE ......................................................................................... 27

2.7 PRICING AT LOUIS VUITTON ........................................................................................ 28

2.8 PRICING OF ONIONS IN MAHARASHTRA ................................................................. 28

2.9 FARM PRODUCTS IN EUROPE AND OTHER COUNTRIES ....................................... 28

2.10 PRICING OF MONEY IN SWITZERLAND ..................................................................... 29

2.12 HERD MENTALITY IN THE STOCK MARKET - HARSHAD MEHTA ....................... 30

2.13 DEVAS MULTI MEDIA SHARE ....................................................................................... 30

2.14 OTHER ACADEMIC ADVANCEMENTS IN FINANCE ................................................ 31

2.15 FINANCE AS AN ART....................................................................................................... 33

2.16 WARREN BUFFET ............................................................................................................ 33

2.17 WALL STREET CRASH (1929) AND GLOBAL MELTDOWN (2008) .......................... 34

SECTION – I ................................................................................................................................ 41 3-RESERVE BANK OF INDIA (RBI) DATA ANALYSIS- MEDIUM AND LARGE PUBLIC

LIMITED COMPANIES IN INDIA FROM 1950-51 TO 1996-97 ............................................. 41 ...................................................................................................................................................... 41


3.1 AN – OVERVIEW .............................................................................................................. 41

3.2 TRENDS OBSERVED THROUGH COMMON SIZE BALANCE SHEET & P& L

ACCOUNT..................................................................................................................................... 46

3.3 DEFINITION OF 'COMPOUND ANNUAL GROWTH RATE - CAGR‘ (CONCEPT

USED IN INDEXING) .................................................................................................................. 46

3.4 TRENDS OBSERVED THROUGH INDEXING BALANCE SHEET & P& L

ACCOUNT..................................................................................................................................... 50

3.5 GRAPHICAL OBSERVATIONS ...................................................................................... 51

3.6 BREAKEVEN POINT (BEP) ANALYSIS ........................................................................ 51

3.7 REGRESSION ANALYSIS BASED ON CORPORATE FINANCIAL PERFORMANCE

MODEL .......................................................................................................................................... 63

3.7.1 Calculations and Assumptions ..................................................................................... 64

3.7.2 Calculation of Return on Equity based on book profit (ROE) .................................... 64

3.7.3 Calculation of Return on Equity based on Cash Profit (Cash ROE) ........................... 65

3.7.4 Calculation of Return on Capital Employed based on Book Profit (ROCE) ............... 65

3.7.5 Calculation of Return on Capital Employed based on Cash Profit (Cash ROCE) ...... 66

3.7.6 P/V Ratio (PV Ratio) ................................................................................................... 66

3.7.7 Margin of Safety based on book profit (MOS) ............................................................ 66

3.7.8 Margin of Safety based on cash profit (Cash MOS) .................................................... 67

3.7.9 Turnover Ratio (ATR) ................................................................................................. 67

3.7.10 Financial Leverage ....................................................................................................... 67

3.7.11 Tax Impact or Tax Leverage ........................................................................................ 67

3.7.12 Net Profit Margin based on Book Profit ...................................................................... 68

3.7.13 Net Profit Margin based on Cash Profit ....................................................................... 68

3.7.14 Operating Profit Margin based on Book Profit ............................................................ 68


3.7.15 Operating Profit Margin based on Cash Profit ............................................................ 68

3.7.16 Regression Analysis ..................................................................................................... 68

3.7.17 Output of Regression Analysis ................................................................................... 69

3.7.18 Summary of 10 equations ........................................................................................... 78

SECTION- II ................................................................................................................................. 79

4-CMIE DATA - FIVE SECTORS DATA ANALYSIS VIZ. MANUFACTURING, MINING,

ELECTRICAL, 'CONSTRUCTION AND REAL ESTATE' AND 'NON-FINANCIAL' SECTORS

FROM 1992-93 TO 2012-13 THROUGH ‗REGRESSION ANALYSIS‘................................... 79

...................................................................................................................................................... 79

4.1 AN OVERVIEW ................................................................................................................. 80

4.2 SUMMARY OF MULTIPLE REGRESSION ANALYSIS OUTCOME ........................ 110



4.5 COMPARISONS BETWEEN THE STUDIES DONE ON RBI (SECTION I ) AND

CMIE (SECTION II) DATA ....................................................................................................... 113

4.5.1 Factors Common to RBI & CMIE data for 5 industries ............................................ 113

4.5.2 Difference in RBI & CMIE data for 5 industries ....................................................... 114

SECTION-III .............................................................................................................................. 115 5-LITERATURE REVIEW ........................................................................................................ 115 .................................................................................................................................................... 115

5.1 REVIEW OF PUBLISHED RESEARCH ........................................................................ 116

5.2 A REVIEW OF RESEARCH PAPERS -A PROFILE ..................................................... 120

5.2.1 Topic: Financial Objectives of Business: Research Papers (1) ................................. 120

5.2.2 Topic: Financial Leverage: Research Papers (2-8) .................................................... 121

5.2.3 Topic: Capital Investment Decisions-Research papers 9—10 ................................... 124

5.2.4 Capital Structure - Research Papers — 14-20 .......................................................... 129

5.2.5 Cost of Equity -- Research Papers 21-23 .................................................................. 141

5.2.6 Dividend policy- Research Papers - 24-25 ................................................................ 144


5.2.7 Corporate Decision making Research Papers 26-29 .................................................. 148

5.2.8 DETAILED REVIEW OF RESEARCH PAPERS (23) AND THESIS (2) .............. 153

STUDENT SECTION-IV ........................................................................................................... 184 6-STUDY OF ARTICLES ON ―SURPLUS CASH A MORE SERIOUS PROBLEM THAN CASH

DEFICIT‖ ................................................................................................................................... 184 .................................................................................................................................................... 184

6.1 IS SURPLUS CASH A MORE SERIOUS PROBLEM THAN CASH DEFICIT? .......... 184

6.1.1 PSUs must use surplus cash or give them to others to invest: FM ............................ 185

6.1.2 PM to meet PSU chiefs to discuss plans for investing cash surplus .......................... 185

6.1.3 RIL earns nearly Rs. 8,000 crore from treasury operations ....................................... 186

6.2 GLOBAL PICTURE ......................................................................................................... 187

STUDENT SECTION-IV ........................................................................................................... 189

7- INDIA INC. BEATS CHINESE PEERS IN FINANCIAL HEALTH ................................... 189 .................................................................................................................................................... 189

7.1 INDIA INC. BEATS CHINESE PEERS IN FINANCIAL HEALTH ............................. 189

STUDENT SECTION-IV ........................................................................................................... 192 8- CMIE –DATABASE INDIA INC SECTOR-WISE FINANCES .......................................... 192

.................................................................................................................................................... 192

8.1 CMIE – DATABASE INDIA INC SECTOR-WISE FINANCES ................................... 192

8.2 RETURN ON TOTAL ASSETS (ROTA- %) .................................................................. 193

8.3 CMIE – DATABASE INDIA INC SECTOR-WISE FINANCES: AN OVERVIEW –

2012-13......................................................................................................................................... 194


2012-13......................................................................................................................................... 195

8.5 CMIE – DATABASE INDIA INC SECTOR-WISE FINANCES - AN OVERVIEW .... 197

8.5.1 Manufacturing Sector -1993-94 to 2012-13 .............................................................. 197

8.5.2 Mining Sector -1993-94 to 2012-13 .......................................................................... 198

8.5.3 Electrical Sector -1993-94 to 2012-13 ....................................................................... 198

8.5.4 Construction-Real Estate Sector -1993-94 to 2012-13 .............................................. 199


8.5.5 Non-Financial Sector -1993-94 to 2012-13 ............................................................... 199

SECTION-V ............................................................................................................................... 200 9-INDUSTRY SPEAK ............................................................................................................... 200 .................................................................................................................................................... 200

9.1 TRENDS IN INVESTMENT BANKING INDUSTRY – INDUSTRY SPEAK ............. 201

...................................................................................................................................................... 201

9.2 TRENDS IN BANKING INDUSTRY – INDUSTRY SPEAK ....................................... 203

10 GLIMPSES PRE-BUDGET 2014 .................................................................................. 208

.................................................................................................................................................... 208 Error! Not a valid embedded object.$..................................................................................... 210 10 BIBLIOGRAPHY ............................................................................................................ 211

...................................................................................................................................................... 211

10 BIBLIOGRAPHY ............................................................................................................ 213

...................................................................................................................................................... 213


List of Table/Figures/Charts Table 2.1 Focus Areas for Research in Finance- Researchers and Journal ................................. 38 Table 3.1 Common Size Financial Statement Analysis ............................................................... 44 Table 3.2 Common Size P& L account........................................................................................ 45 Table 3.3 Indexing Financial Statement- Balance Sheet ............................................................ 48

Table 3.4 Profit and Loss Account............................................................................................. 49 Table 3.5 Profit after Tax Distribution to Shareholders as equity dividend & saving as retained

earnings 52 Graph 3.6 Dividend and Retained Earnings ................................................................................. 52 Table 3.7 Marginal Tax Rate ......................................................................................................... 53

Graph 3.8 Reduction in tax rate indicating year wise ................................................................... 53 Table 3.9 Depreciation as a percentage of Gross Block .............................................................. 54

Graph 3.10 Percentage depreciation charged by Indian INC ......................................................... 54 Table 3.11 Gross Profit Margin ..................................................................................................... 54

Graph 3.12 Gross Profit Margin has improved drastically in post liberalization years .................. 55 Table 3.13 Net Profit Margin ....................................................................................................... 55

Graph 3.14 Net Profit Margins .......................................................................................................... 56 Table 3.15 Interest Cost ................................................................................................................. 56 Graph 3.16 Interest Cost ................................................................................................................. 56

Table 3.17 Long term Debt to equity Ratio ................................................................................... 57 Graph 3.18 Indian Corporate .......................................................................................................... 58

Table 3.19 Salary Cost as a percentage of Total Cost ................................................................... 58

Graph 3.20 Money spent by Indian Public limited companies on salary as proportion .................... 59

Graph 3.21 Liquidity to Profitability ............................................................................................. 59 Graph 3.22 Indian companies have shifted from current assets to fixed assets .............................. 59

Table 3.23 Liquidity to Profitability .............................................................................................. 60 Graph 3.24 Cash & inventory levels ............................................................................................... 60 Table 3.25 Liquidity to Profitability - Current Ratio ..................................................................... 61

Graph 3.26 Current Ratio ............................................................................................................... 61

Figure 3.27 Regression Analysis Based On Corporate Financial Performance Model ............... 63 Table 3.28 Return on Equity (ROE) .............................................................................................. 69 Table 3.29 ANOVA table .............................................................................................................. 70 Table 3.30 Coefficient Matrix ........................................................................................................ 72

Table 3.31 Correlation Matrix ........................................................................................................ 73

Table 3.32 Cash ROE as a function of CPM, ATR and CE to NW ............................................... 73

Table 3.33 ROCE as a function of OPM and ATR ........................................................................ 74 Table 3.34 Cash ROCE as a function of Cash OPM and ATR ...................................................... 74 Table 3.35 ROCE as a function of PV Ratio, MOS and ATR ....................................................... 75 Table 3.36 Cash ROCE as a function of PV Ratio, Cash MOS and ATR ..................................... 76

Table 3.37 ROE as a function of PV Ratio, MOS, ATR, CE to NW, PBT/EBIT, Tax Leverage . 76 Table 3.38 Cash ROE as a function of PV Ratio, Cash MOS, ATR, CE to NW, PBT/Cash EBIT,

Tax Leverage ..................................................................................................................................... 76 Table 3.39 ROE as a function of ROCE, CE to NW, PBT/ EBIT, Tax Leverage ......................... 77


Table 3.40 Cash ROE as a function of Cash ROCE, ATR, CE to NW, PBT/ EBIT, Tax Leverage

77 Table 3.41 Multiplier matrix .......................................................................................................... 78 Table 4.1 Cash Profit ROE as a function of CPM, ATR & CE to NW – Manufacturing ........... 81

Table 4.2 Book Profit ROE as a function of NPM, ATR & CE to NW ...................................... 82 Table 4.3 Cash Profit ROCE as a function of Cash OPM & ATR .............................................. 83 Table 4.4 Book Profit ROCE as a function of OPM & ATR....................................................... 83 Table 4.5 Cash Profit ROE as a function of PV Ratio, CashMOS, ATR, PBT/Cash EBIT &

PAT/PBT 84

Table 4.6 Book Profit ROE as a function of PV Ratio, MOS, ATR , PBT/EBIT & PAT/PBT .. 84 Table 4.7 Cash Profit ROCE as a function of PV Ratio, CashMOS & ATR .............................. 85

Table 4.8 Book Profit ROCE as a function of PV Ratio, MOS & ATR ..................................... 86 Table 4.9 Cash Profit ROE as a function of EBIT/CE, PBT/EBIT & PAT/PBT ...................... 86 Table 4.10 Book Profit ROE as a function of EBIT/CE, PBT/EBIT & PAT/PBT ..................... 87 Table 4.11 Cash Profit ROE as a function of CPM, ATR & CE to NW- Mining ......................... 87

Table 4.12 Book Profit ROE as a function of NPM, ATR & CE to NW ...................................... 88 Table 4.13 Cash Profit ROCE as a function of CashPM & ATR .................................................. 88

Table 4.14 Book Profit ROCE as a function of OPM & ATR....................................................... 89 Table 4.15 Cash Profit ROE as a function of PV Ratio, CashMOS, ATR , PBT/CashEBIT &

PAT/PBT 89

Table 4.16 Book Profit ROE as a function of PV Ratio, MOS, ATR , PBT/EBIT & PAT/PBT .. 90 Table 4.17 Cash Profit ROCE as a function of PV Ratio, CashMOS & ATR ............................. 91

Table 4.18 Book Profit ROCE as a function of PV Ratio, MOS & ATR ..................................... 91 Table 4.19 Cash Profit ROE as a function of EBIT/CE, PBT/EBIT & PAT/PBT ...................... 92

Table 4.20 Book Profit ROE as a function of EBIT/CE, PBT/EBIT & PAT/PBT ....................... 93 Table 4.21 Cash Profit ROE as a function of CPM, ATR & CE to NW- Electrical...................... 93

Table 4.22 Book Profit ROE as a function of NPM, ATR & CE to NW ...................................... 94 Table 4.23 Cash Profit ROCE as a function of Cash OPM & ATR .............................................. 94 Table 4.24 Book Profit ROCE as a function of OPM & ATR....................................................... 95

Table 4.25 Cash Profit ROE as a function of PV Ratio, CashMOS, ATR , PBT/EBIT &

PAT/PBT 95

Table 4.26 Book Profit ROE as a function of PV Ratio, MOS, ATR , PBT/EBIT & PAT/PBT .. 96 Table 4.27 Cash Profit ROCE as a function of PV Ratio, CashMOS & ATR ............................. 96

Table 4.28 Book Profit ROCE as a function of PV Ratio, MOS & ATR ..................................... 97 Table 4.29 Cash Profit ROE as a function of EBIT/CE, PBT/EBIT & PAT/PBT ...................... 98 Table 4.30 Book Profit ROE as a function of EBIT/CE, PBT/EBIT & PAT/PBT ....................... 98

Table 4.31 Cash Profit ROE as a function of CPM, ATR & CE to NW- Construction ................ 99 Table 4.32 Book Profit ROE as a function of NPM, ATR & CE to NW ...................................... 99 Table 4.33 Cash Profit ROCE as a function of Cash OPM & ATR ............................................ 100 Table 4.34 Book Profit ROCE as a function of OPM & ATR..................................................... 101

Table 4.35 Cash Profit ROE as a function of PV Ratio,Cash MOS, ATR , PBT/CashEBIT &

PAT/PBT 101 Table 4.36 Book Profit ROE as a function of PV Ratio, MOS, ATR, PBT/EBIT & PAT/PBT . 102 Table 4.37 Cash Profit ROCE as a function of PV Ratio, CashMOS & ATR ............................ 102 Table 4.38 Book Profit ROCE as a function of PV Ratio, MOS & ATR ................................... 103


Table 4.39 Cash Profit ROE as a function of EBIT/CE, PBT/EBIT & PAT/PBT .................... 103 Table 4.40 Book Profit ROE as a function of EBIT/CE, PBT/EBIT & PAT/PBT ..................... 104 Table 4.41 Cash Profit ROE as a function of CPM, ATR & CE to NW- Non-Financial Services

105

Table 4.42 Book Profit ROE as a function of NPM, ATR & CE to NW .................................... 105 Table 4.43 Cash Profit ROCE as a function of Cash OPM & ATR ............................................ 106 Table 4.44 Book Profit ROCE as a function of PM & ATR ...................................................... 106 Table 4.45 Cash Profit ROE as a function of PV Ratio, CashMOS, ATR , PBT/EBIT &

PAT/PBT 107

Table 4.46 Book Profit ROE as a function of PV Ratio, MOS, ATR , PBT/EBIT & PAT/PBT 107 Table 4.47 Cash Profit ROCE as a function of PV Ratio, CashMOS & ATR ........................... 108

Table 4.48 Book Profit ROCE as a function of PV Ratio, MOS & ATR ................................... 109 Table 4.49 Cash Profit ROE as a function of EBIT/CE, PBT/EBIT & PAT/PBT .................... 109 Table 4.50 Book Profit ROE as a function of EBIT/CE, PBT/EBIT & PAT/PBT ..................... 110 Table 4.51 Manufacturing Sector -Multiplier Matrix ................................................................. 110

Table 4.52 Mining Sector -Multiplier Matrix .............................................................................. 111 Table 4.53 Electrical Sector -Multiplier Matrix........................................................................... 111

Table 4.54 Construction -Real Estate Sector -Multiplier Matrix ................................................. 112 Table 4.55 Non-Financial Sectors - Multiplier Matrix ................................................................ 112 Table 5.1 Summarized Table of an Overview of Research Papers Studied .............................. 116

Table 7.1 India and China Relative to the world (Percentage Shares) ...................................... 189 Table 7.2 Ratios of India and China .......................................................................................... 190

Table 8.1 CMIE – Database India Inc Sector-Wise Finances .................................................... 192 Graph 8.2 CMIE – Database India Inc Sector-Wise Finances .................................................... 193

Table 8.3 Sector Wise Return On Total Assets (ROTA- %) ..................................................... 193


1-GENESIS, TRENDS IN FINANCE

Dr. Amit Oak, Director, DR VN BRIMS

India‘s financial markets have evolved and undergone structural change during the course of the

economic reforms. The Indian economy shifted to higher growth trajectories during the same

period. The Indian securities market proved the harbinger of the modern Indian financial markets.

The rapid strides made (of course, some dictated by time and circumstances) have helped the Indian

Financial market emerge as a benchmark for the rest of the world.

This study seeks to trace the development of the Financing of India INC structure during the period

from Indian Independence that is 1947 to 1991, (that is the Pre Liberalization) and 1991 onwards to

till date (Post Liberalization), as is evident from the flow of funds accounts.

The extant literature describes the modern flow of funds accounts as representing a systematic

record of net transactions involving financial instruments during a given period of time. The flow of

funds accounts are a branch of social accounting of a country. All the economic transactions in a

monetized economy involve the exchange of financial claims among the participants. (Source RBI

database and the CMIE database)

The flow of funds accounts serve as a useful analytical tool in many respects:

Identification of individual sectors having financial surpluses or deficits,

Determination of the causes of these surpluses/deficits,

The financing of the deficits and, thereby,

The inter-sectoral linkages,

Tracing the growth of important economic institutions, such as the mutual funds,

Identification of the pattern of financing of the capital stocks,

Assessment of the impact of monetary policy actions, to name the a few

In this study, we restrict ourselves to profiling the Indian Financial Markets, as seen through the

financial development ratios derived from the flow of funds accounts of the Indian economy. The

data to be studied is sought from the Reserve Bank of India and the CMIE.


According to the Reserve Bank of India (RBI), flow of funds accounts is a set of accounts which

depicts the inter-sectoral flow of funds among major sector s of the economy ‗from whom to

whom‘ basis. The RBI has been publishing the flow of funds accounts of the country since

December 1950-51. The data for India, pertain to one year, the financial year.

The published accounts pertaining to the period 1951–52 to 1996-97 are available in the several

issues of the RBI‘s monthly Bulletin. In the Indian economy, the institutional units, i.e., the

economic entities capable of engaging in transactions with other units, are grouped into six categories, viz., (i) banking sector; (ii) other financial institutions; (iii)private corporate business; (iv) government sector; (v) rest of the world; and (vi) household sector.

Financial assets and liabilities are classified under ten major categories of financial instruments,

viz., (i) currency;

(ii) de-posits;

(iii)investments;

(iv) loans and advances;

(v) small savings;

(vi) life funds;

(vii) provident funds;

(viii) trade debts;

(ix) foreign claims not elsewhere classified; and (x) other claims not elsewhere classified. The data from the database of the CMIE (Economic Outlook) under study is pertaining to the

period 1996-97 to 2012-13.


This study seeks to trace the development of the Financing of India INC during the period

mentioned above, as is evident from the flow of funds accounts. Wherever the reporting period has

overlapped, we have taken into account the latest data. The data on the indicators of India‘s

financial development would be presented in the subsequent sections of study.

Financial claims issued by the economic agents are classified as primary issues and secondary

issues. Primary issues are the claims issued by non-financial sector or the ultimate borrowers.

Claims issued by the financial intermediaries, on the other hand, are called secondary issues. The

flow of funds accounts provide data on financial claims which can be further analyzed to assess the

depth and maturity of the financial markets.

The study would be made in-depth tracing and then identifying the trends in the Finance in the

India INC since independence. The study would be carried out over the period of next year and the

findings would be presented at the Annual Seminar to be held in the next Academic year (2014-15)

The overall resource(Financial) management via the route of Return on Investments and specific

aspects of Financial Liquidity, Profitability, Asset utilization would be taken into consideration and

the impact of the same on the financial structure of the economy as a whole would be studied and

taken in to consideration.

Following activities have been identified to design the study. Study of the database (Secondary Sources) namely the Reserve Bank of India Fund Flow

statements released through their monthly publications and the data base released by the Center for

Monitoring the Indian Economy Study of the already published research papers, articles and PhD thesis. About 28 research papers

spreading from around 1973 till date would be analyzed and the findings would be listed pertaining

to the theme. Study of the academic books and articles, budgetary data of the India INC since independence

would be also carried out to find out the correlation of the RBI and CMIE data bases for the defined

period. An analysis of the findings would be shown on the following ground. The ratio techniques would

be used to interpret the raw data.


The financial ratio is an indicator of the rate of financial development in relation to economic

growth. The study

would be composed of the calculation and interpretation of the following ratios for aforesaid data. •Return on Equity (ROE) •Return on Capital Employed (ROCE) •Financial Leverage •Profit Volume Ratio (P/V Ratio) •Margin of Safety (MOS) •Turnover ratio

The data would be analysed during the course of study on the following lines as an explanation. The financial operations ratio refers to two aspects of treasury management in particular and

financial management in general. The relevant ratios include

(Profit Before Tax/Operating Profit) * 100 This ratio calculation would indicate the extent to which profit is depressed on account of interest.

The judicious use of debt and competitive pricing of funds is key to success.

(Capital Employed/Net worth) * 100 This ratio calculation indicates the mix of finance that is Debt: Equity The calculation of tax management would indicate the role of taxes in depressing profit after tax.

Successful tax planning will help transmission of profit before tax to share holders in increasing

proportion. The treasury management team and the line managers have to coordinate to time

investment decision to suit the cut off points prescribed by income tax authorities to claim

depreciation and other deductions. This measure reflects the relation between financial development and the growth of physical

investment. The trends in all the financial development ratios, thus, reflect the gradualist approach

in the economic re-forms that India embraced.

The broad outline of the study would be organized and presented in a Research Monograph to be

published on April 14, 2014. The objective of this research monograph is to present an analysis of

broad trends in the financing of development in India.


The story line in corporate finance has remained remarkably consistent over time. Talking about

story lines allows me to set the theme of this Research Monograph. This Research Monograph

would bring out a story, which essentially summarizes the corporate finance view of India INC.

It would classify all decisions made by any business into three broad groups decisions on where to

invest the resources or funds that the business has raised, either internally or externally (the

investment decision), decisions on where and how to raise funds to finance these investments (the

financing decision), and decisions on how much and in what form to return funds back to the

owners (the dividend decision).

This monograph should be read as a prelude to the forthcoming research volume where a

substantial data and substantiation of data would be carried out bringing out the different aspects

and the changes in the trends of finance.


2-PROLOGUE

Dr. Guruprasad Murthy, Director General , DR VN BRIMS

”Money is the most important thing in the world. It

represents health, strength, honour, generosity and beauty

as conspicuously and undeniably as the want of it

represents illness, weakness, disgrace, meanness and

ugliness.”

George Bernard Shaw (1856-1950)

Every branch of knowledge has its fundamental discovery. In

mechanics it is the wheel, in science fire, in politics the vote.

Similarly, in economics, in the whole commercial side of man’s

social existence, money is the essential invention on which all

the rest is based.

- Sir Geoffrey Crowther(1907-1972)


This monograph on Trends in Finance (TIF) studies different dimensions of ‗management of

finance‘ in India INC over the years. TIF, in other words, is an exploration of different approaches to

financial management given different data bases, as also the implications of the same. In fact, financial

management is the art and science of managing resources (physical and financial, animate and

inanimate) of an enterprise with the purpose of getting the best possible result-resource ratio to

continuously meet the expectations of all stakeholders of any enterprise. The idea is to ensure that

scarce resources are allocated effectively and efficiently to competing ends and where competing ends

are limited and resources are in surfeit, the challenge is to identify the most productive competing

end/s and also newer productive opportunities, which can absorb the resources in excess (Exhibit 2)1.

Thus, the end result of effective financial management is seen as efforts which can bring success to

any enterprise by making ―two blades of grass grow where only one grew before‖. Translating this

lofy thought of the American philosopher Jonathan Swift into action, into the field of finance, it refers

to the ability to get the best possible output (physical / financial) for any given input or using the least

input (physical / financial) for any given output. Ideally, the rate of output should go on increasing and

the rate of input should be on the decline so that the result - resource ratio catapults to higher and

higher levels of attainment, above and beyond historic levels, into seamless heights through ‗stretch

goals.‘ In financial terms, it means that the ratio of profit (output) / investment (input), commonly

referred to as return on investment (ROI) (%) should be well sustained at all times and, of course,

always placed above the minimum acceptable rate of return*2.

Thus, the ways and means of attaining and maintaining higher and higher ROI, open to management,

are simultaneously many and limited, a contradiction of terms, nevertheless true. The limited options

1 &2*The minimum acceptable rate of return is also referred to as the modicum or target rate of return which is a

fundamental standard of financial performance against which the outcomes of managerial actions are assayed. The minimum acceptable rate of return refers to the marginal cost of capital against which the marginal efficiency of capital of various management actions are to be assayed. Incidentally the minimum acceptable rate of return (R) is always defined as R >ko where ko is the cost of capital. Depending on the state of the health of business and a host of other factors, R may be pitched at or near ko or much above ko. In any case R should never be below ko.

2


open can be vividly gauged with the help of the simplest version of the Du Pont ROI chart presented

below:

Exhibit 1

R .O .T. A.

2.1 MAXIMISING SHAREHOLDERS WEALTH

Corporate financial policy, all over the world, accepts maximizing shareholder value as a key

objective. There have been several refinements to this thought and the expression shareholder value is

often replaced by stakeholder value, corporate wealth, market value, economic value added et al.

A study conducted by Pandey and Bhatt (1990) of 57 Indian Companies3showed that maximizing the

market value of enterprise is not necessarily the key objective of Indian business. According to the

study, four important goals are pursued viz. ensuring the availability of funds, maximizing growth,

maximizing operating profits before interest and taxes and maximizing the rate of return on

investment. According to another study conducted by ManojAnand (2002)4, the important corporate

financial objectives, in rank order of importance, are: maximizing EBIT / EPS, maximizing the spreads

between ROI and WACC (EVA), maximizing the spread between CFROI and WACC (CVA),

maximizing market value added (MVA) of the firm and reduction in the side costs in the form of

conflicts amongst various stakeholders.

3 Pandey, I. M., and Ramesh Bhat. “Signifance of Financial Goals pursued by Companies in India: Survey Findings.”

Journal of Financial Management & Research - International Review of Finance July-December (1990). 4 Anand, Manoj. “Corporate Finance Practices in India: A Survey.” Vikalpa 27. 4 October-December. 2002

Return on Total Assets (ROTA) = (Net Profit / Total Assets x 100)

= x (times

)

Sales

Total Assets

x 100 Net Profit

Sales


Exhibit 2

Surfeit cash (liquidity), a serious problem faced by enterprise from time to time, provides a

challenge to enterprise to sustain profitability in the wake of excess cash or cash related assets and

given the indisputable dictum of finance viz. ‗liquidity and profitability are at loggerheads‘. For

example, Infosys has been hounded by analyist and investors to deploy its excess cash, year on

year basis, to either invest productively or reward shareholder. For the year ended 31st March,

2011, Infosys had a cash balance of Rs. 129 billion equivalent to USD 3.3 bn (circa). Of course,

this is chicken feed in relation to the huge balances maintained by mega companies in the US. For

example: Apple with USD 75.87 billion cash is richer than the US Treasury which has only USD

73.76 billion. Incidentally, Microsoft another US based ICT company has cash reserve of USD 40

billion (29/07/2011). 40 PSUS in India are sitting on a pile of cash of Rs. 2 lakh, crores. Even

capital intensive units BHEL, Bharat Electornics, Siemens and Alstom Projects have huge cash

reserves. The total cash pile of BSE 500‘s Richie Rich has grown to Rs. 128,500 crores, a 14.3%

increase over last year‘s figure. (ET Bureau, 12/07/2011).

10 Indian companies including RIL, Infosys, Coal India, Cairn India and ONGC are carrying a

cash of Rs. 2.3 Lakh crores. RIL alone carries 33% of the said cash pile, which is nearly 20% of

the company‘s revenue. Infosys with Rs. 20,591 crores is carrying 61% of its annual sales amount.

Cash accumulation adversely affects return on equity and tends to be value dilutive unless a

company can continuously and successfully postulate successor projects which can absorb the

surplus cash productivity that is to say projects where internal rates of returns exceeds the

minimum acceptable rate of return. Otherwise, companies tend to deploy surplus cash into

financial assets, possibly gilt eddged returns, leading to diluted return on equity (%). Thus,

Infosys is earning just 6 to 7 per cent yield on financial assets against the cost of equity capital at

12-14 per cent. Accordingly, Infosys return on equity has gone down rather significantly over the

years due to excessive liquidity. The top 10 firms listed on NASDAQ suffer from a cash pile of $

117.6 billion (over Rs. 6 lakh crores).

SOURCE: Naidu, K. B. and S. Shinde. ―India Inc hold on to its cash.‖ Business Standard

(Mumbai) 7th

May, 2012.

A contrarian view states that India INC, which was sitting on a cash pile, is slowing reducing the

accumulation. High interest rates are forcing companies to shy from lenders, including banks to

meet the working capital needs of enterprise. The short-term financial needs of business are being

met by withdrawing deposits using cash accumulation and reducing borrowing as much as

possible. Further, excess cash is also deployed for debt-repayment and capital expenditure and

also to extinguish borrowings from abroad


Exhibit 3

2.2 OPTIONS TO IMPROVE ROI

The options open to improve ROI are increased sales, reduced cost and management of assets

effectively and efficiently. One more option can be

inducted by classifying cost management into two options viz. managing variable costs and fixed costs

respectively.

Within these three (or four) options, management need to identify a myraid ways and means of

exploring the same to manage the top line (sales), middle line (costs) and bottom line (net profit) of an

enterprise.

2.3 IMPROVE ROI - INCREASED SALES

One of the options opened to improve the ROI of any enterprise is increased sales. Sales in financial

terms for any business are a product of number of units sold and the selling price per unit. Usually,

high volume necessarily means sacrifice in the margin. Companies which sell limited number of units

can afford to have improved or high margins. Essential commodities and consumer good items are

characterised by high volume and low margin. As against this, luxury items like Mercedes Car or

SURFEIT CASH - IDENTIFYING INVESTMENT OPPORTUNITIES

Philately is an important avenue which can absorb surplus liquid resources and also provide

competitive return on investment. It is estimated that as an asset class ‗philately‘ is very steady and

usually offers around 10% return on an annualised basis. It is said that about 25 odd high net worth

individuals, in India, are already using philately as an avenue of investments. The minimum

amount required for investing in a rare stamp is over Rs. 50 lakhs. Further, rare stamps can fetch

upto 1 million USD. It is interesting to note that there is a lot of interest in stamps from India. For

example, a ―1854 Four Annas Inverted Head‘ stamp fetched a record price for India. The stamp,

which was estimated to fetch GBP 18,000 - GBP 20,000 was sold for GBP 105,390 at an auction in

October, 2010 in London. ―This will soon hit a million pounds.‖

SOURCE: ―Trend spotting Philately emerges as high-return investment‖. The Times of India 30th

November, 2008: p. 21.


Rolex watches would enjoy a higher margin and rather low volume. In addition to volume and selling

price per unit, the mix of sales plays an important role in deciding the aggregate revenue of a business.

Further, there is one more dimension and that is the currency in which the sales take place and the

status of that currency in terms of its strength vis-à-vis the local currency. All these factors taken

together, in addition to cost, result in a profit-volume-cost relationship for a business. Further, mere

increases in revenue do not contribute to the bottom-line of a business though marketing managers,

world over, entertain an illusory belief that more sales mean more profit. Hence, the theme ‗More

Revenue does not mean More Profits‘.

Exhibit 4

2.4 IMPROVE ROI - COST MANAGEMENT

Cost management (including cost cutting) is key to sustaining the bottom line of business.

Telepresence is a new cost cutting tool. In fact, Tata Consultancy Services has gone on

records, in its annual report 2008-09 to say that the costs of overseas travel have been reduced

after introduction of increased video-conferencing. Further, there is green policy effect - the

decrease in the company‘s carbon footprint. Though the economics of telepresence is not very

attractive as of today Tata Communications has pioneered the public room model to tackle the

HUL - MANAGING COST - PROFIT - VOLUME - MIX

―Buoyed by a mix of product price increases and volumes, fast-moving consumer goods (FMCG)

major Hindustan Unilever (HUL) posted an 18% growth in net profit at Rs. 754 crore for the

third quarter ended December, 31, 2011, compared to Rs. 638 crore in the corresponding period

last year, Net sales rose 16% to Rs. 5,853 crore from Rs. 5,027 crore during the period.‖

This is a good example of sales increase (16%) through better management of price increases,

product mix, volumes along with dynamic cost management through ―aggressive savings

programs coupled with judicious pricing‖. Personal products, oral care, beverages and packaged

foods grew in the range of 11 to 14%. However, the performance of Knorr soups was muted.

SOURCE:The Times of India (Mumbai) 7th

February, 2012.


exorbitant installation cost. ―Customers can access the public rooms by paying just Rs. 6,000

- Rs. 7,500 per hour as part of a special promotional offer.‖ Thus, an otherwise cost or

expense centre is converted into a profit or investment centre.

Frugality has to be revered and not ridiculed. Frugality can be promoted if we create a culture

where simplicity is respected and not viewed as miserliness. Mahatma Gandhi‘s ventures in

simple living come to the fore, ―Governments must penalise the waste of resources, and

should create laws to ensure this. People will gradually develop habit of consuming only as

much as is necessary.‖

Tata Motors had posted a net loss of Rs. 500 crores in 2001. This was regarded as one of the

largest losses incurred by any company in one year. A remarkable turnaround took place

because of a unique cost management program which was called ‗cost erosion‘. Among other

initiatives the following were the important moves:

cross functional teams to implement and monitor cost erosion initiatives;

e-sourcing in lieu of traditional purchasing;

rationalising vendor profile. Infact the company moved towards a single vendor policy;

revamped organisational structure from a bureaucratic model to a collaborative,

camaraderie, driven mode. The turnaround took 5 years though.

Bollywood actors, big companies, luxury hotels, BPOs, bankers, socialites, husbands, wives

and lovers … all are tightening belts to battle the economic squeeze to combat the global

meltdown. The Times of India has identified 30 ways and means of cutting cost - atleast one

each for every alphabet of the English language that is to say A to Z5.

In October, 2008 following the global meltdown the CEO of Sony, Mr. Howard Stringer, said,

―We are selling a lot of television sets, more than ever, but we are not making money on

them, and that’s a by-product of a fixed-cost problem that we need to address.‖

5 Raaj, Neelam. andInsiya Amir, “A-Z of Cutting Costs.” The Times of India (Mumbai) 15th December, 2008.


Exhibit 5

Thus the bottom line of a company depends on a proactive combination of topline (sales) and

middleline (costs). In Sony, again, cutting fixed cost meant shutting some plants and also cutting jobs

to increase profits with a view to bolster profitability. In Japan, in particular fixed costs are an issue.

80% of the sales are outside Japan and a sizeable proportion of production takes place within Japan.

Sony‘s, production costs are vulnerable to an appreciating Japanese Yen with a relatively high local

labour cost. However, sales are in currencies which are usually weaker than the Japanese Yen.

Production activity has to be hived off from Japan if the fixed costs are to be reduced. Thus, Sony had

to initiate a multipronged attack to sustain its ROI, post global meltdown, which included increased

revenue, reduced variable cost, reduced fixed cost and divestment of capital in Japan and reinvesting in

locations outside Japan due to the strength of the Japanese Yen.

COST MANAGEMENT - MAHARASHTRA

In several parts of Maharashtra due to shortage of power and labour, in rural and hilly areas,

construction labour is difficult to procure and workers are demanding higher wages. To combat the

labour shortage the Government of Maharashtra decided (2009) to hire donkeys to perform certain

tasks which include movement of ‗construction material, such as bricks, metal and sand from one

place to another.‘ The price of a donkey depends on its physique, height, colour, age and the

number of teeth. Donkeys from Kathewadi from Gujarat are the most expensive and are priced

between Rs. 10,000 - Rs. 15,000. This price is said to be nearly 50% higher than last year. In

Ahemdnagar district, in Maharashtra, Donkey Bazaars are held to auction Donkeys.

SOURCE:Marpakwar, Prafulla. ―Donkeys kick-start economy.‖ The Times of India (Mumbai) 18th

March, 2009.


Exhibit 6

The multiple options open and the several permutations and combinations available to manage sales,

cost and profits are limited only by the genius of the people in an organisation6. However, the

challenges before managers at the helm of the affairs of any enterprise are to ensure that ―money

works for them rather than they working for money‖. Says Edmund Burke, ―If we command our

wealth we will be rich, if the wealth commands us we are poor indeed‖.

In the context of financial management in an enterprise the question arises as to how to make money in

particular and resources in general work for enterprise rather than the other way round. In an exchange

or money economy, all business transactions are reported in terms of money. Money measurement is,

among others, a universal and cardinal principle governing the financial and accounting process which

6 Improvements in ROI can be derived through a wide variety of options open to management given the said four

options. Within these four options there is a mix of several permutations and combinations involving ownership, creditor, income mix, control rights and a host of other factors in varying degrees, with possible permutation and combinations limited only by the ingeniuity of different markets and their stakeholders (factor, financial and output) and of those who manage the finanacial problems of an enterprise (See Solomon, Ezra. Theory of Financial Management. ColoumbiaUniversity Press, p. 28)

IMPACT OF THE SLIDING INR

The rupee has been depreciating continuously and stood at Rs 55.03 (21st May, 2012) to a USD. It

was Rs. 44.42 (5th

April, 2011) to a USD. If the slide of the rupee vis-à-vis the USD continues the

bottomline of India INC will be adversely affected. In fact, the rupee depreciation has adversely

affected corporate profits in recent times, and continues to do so. Though companies which have

large export sales may benefit due to the falling value of the rupee, yet if the import content of the

product or service is high on balance the gains are limited. Overall, India is a net importer which

would adversely affect the corporate sector profitability. If input cost of key items like petroleum

and related products go up the cost push effects will be seen on the bottomline of enterprise. Hence,

managing return on investment of a business cannot exclude identifying the role of exchange rate

variation and strength of the local currency with its associated impact on the financial health of

individual enterprise.

SOURCE: ―Rupee depreciation may impact corporate profits: Economits.‖ Business Standard 10th

May, 2012: p. 4


generates several financial statements. Hence the couplet:

“Money is a matter of functions four:A medium, A Measure, A Standard and A

Store.”

Again as Aristotle (384 - 322 B.C.) has said ―Everything, then, must be assessed in money; for this

enables men always to exchange their services, and so makes society possible.‖

To make money work for business one has to understand the quantified statements expressed in money

terms and known as financial statements which usually include the following: (a) profit or loss account

for the period ending; (b) balance sheet as on or as of or as at a particular point of time; (c) cash flow

statement for the year ending; and (d) other supporting, supplementary, statements.

Since the common language of business is finance, most of the metrics are financial based. However, it

needs to be understood that the financial numbers are only a mirror image of the actual, physical,

events taking place in business. Hence, it is the reality of business operations and not the financial

ratios that need to be managed. If business operations are well managed automatically the ratios

expressed in financial terms will reflect the same. Further, though there are large number of ratios,

trying to get all the ratios simultaneously in one place to address issues faced by business is a rather

preposterous proposition. The truth is that the substratum of the knowledge base of finance can be

presented through a relatively small number of important financial measures through which it is

possible to appraise and assess the health of any business enterprise. Such measures are derived from

the inter-relationships that exist between the key areas of management viz. operations, investment and

financing cutting across operating excellence (sales, variable and fixed costs and capital employed)

and financial excellence (interest, tax and debt: equity management). Further, the key stakeholders to

be addressed include, among others, managers, owners and creditors. Thus, in a typical financial

model designed to meet shareholders welfare the relationship between overall (total) management

performance (return on equity) is literally a physically product of operating management performance

and financial management performance. While the former in turn is a physical product of the profit-


volume ratio (%) i.e. (contribution margin / sales), margin of safety (%) i.e. (operating profit /

contribution margin) and turnover ratio (times) i.e. (sales/ total assets), the latter is a physical product

of interest management, tax management and management of debt:equity. These ratios help to capture

the functioning of the entire business to guide management in financial decision making in particular

and management decision making in general. The challenge lies not in computation but in

understanding the meaning of the outcomes and how the product of all outcomes, taken together,

present a holistic view of the health of an enterprise leading to synergistic, value creating, returns on

equity or earnings per share (%). The relationship between different ratios is presented below in

Exhibit 7:

Exhibit 7

CORPORATE FINANCIAL PERFORMANCE MODEL

OMP

Return on Capital Employed

FMP

Financial Leverage

x

P/V Ratio (%) = Contribution Margin

Sales x 100

Margin of Safety (%) = Operating Profit

Contribution Margin x 100

Turnover Ratio (Times) = Sales

Capital Employed

Profit before Tax Operating Profit

(%)

Capital Employed Owners Funds

(Times)

Profit after Tax Profit before Tax (%)

TMP = Total Management Performance

OMP = Operating Management Performance

FMP = Financial Management Performance

TMP = Return on Equity (ROE) = Profits after Tax Owners Funds


In addition to the above model, and there are many more, TIF indicate the evolution, development and

use of important absolute measures like economic value added, enterprise value, market share (sales

volume and value) production (volume and value), number of employees (wage cost) and the like to

provide a further boost to the quality and also quantity of information generated and level of

knowledge regarding the health of any enterprise.

2.5 FINANCIAL EPISODES, EVENTS AND EXPERIENCES

TIF can also be explored by tracking and tracing financial episodes, events and experiences.

2.6 IRRATIONAL EXUBERANCE

The emergence of financial models such as the capital asset pricing model and the efficient market

hypothesis, alongwith many other financial models, have glorified the role of science as an input in the

management of finance at the macro and micro levels. Special courses like quantitative methods in

financial management, decision science, financial modelling and econometrics are the order of the day

in Universities and Business Schools all over the world. These scientific theories, usually based on

quantitative techniques, caged in quantitative models, attempt to explain the behaviour of market

forces in an objective and rational manner trying to keep emotions aside and also attempting to ignore

subjective elements like market sentiments and emotions of players, including ‗irrational

exuberance‘, in the stock and other markets.

Exhibit 8

IRRATIONAL EXUBERANCE

Irrational Exuberance describes a heightened state of speculative fervor. It is less intense than

the term ‗speculative mania‘ or ‗speculative orgy‘. Irrational exuberance thus means an

abundance or lavish availability of energy and enthusiasm for irrational behaviour. Eg: Herd

mentality during scams (Harshad Mehta scame 1992 and Ketan Parekh scam 2001), great

crashes including the sub-prime crisis in the US leading to the Sep, 2008 global crisis which

Allan Greenspan described as ‗once-in-a-century crisis‘.


Several instances of irrational exuberance can be cited - thanks to the greed, perversion and ingenuity

of mankind and of course the erratic and volatile behaviour of markets:

2.7 PRICING AT LOUIS VUITTON7

Pricing dynamics operates in different directions. Products which are positioned as luxury items and

remain unsold are actually burnt. As Albert Bensoussan of Louis Vuitton, says ―Our prices remain

constant as we want our customers to feel they’ve paid the right price for the product. To put the

same product on sale would be shortchanging them6.”

2.8 PRICING OF ONIONS IN MAHARASHTRA

The volatility in onion prices shows the role of demand-supply factors in affecting the price level. On

18th

November, 2011, the average onion prices in Lasalgaon (village in Nashik, Maharashtra) was Rs.

900 per quintal and the average onion price was Rs. 2 per kilogram in markets of Nashik. In fact, in

October, 2011, the onion prices crashed below production cost and farmers were not able to recover

their cost of production. Suddenly, in January, 2011, the quantities which arrived in Lasalgaon,

regarded as Asia‘s largest market, fell from 50,000 quintals to 2,000 quintals. The prices soared from

Rs. 1700 per quintal in the first week to Rs. 6,229 per quintal by third week of December, 2011. It is

not untrue to say that from time to time when supply exceeds demand a reverse trend is seen and

farmers have to restrict the acreage under cultivation or literally destroy production to sustain farm

prices. Even in recent times the price of onions was ruling at Rs. 80/kg. and over a period of a 2-3

months slide down to less than Rs. 10/kg.

2.9 FARM PRODUCTS IN EUROPE AND OTHER COUNTRIES

Similarly, excess productions of farm products in Europe are purchased by the European Union to

ensure that farm prices do not crash further to the detriment of the farmer. The quantities involved are

rather huge - 30,000 tonnes of unsold butter, 100 thousand tonnes of skimmed milk powder and other

related farm products. In fact in the eighties the European Union had bought 1.23 million tonnes of

unwanted butter. On several occasions these perishable products are eventually dumped into the sea /

or just destroyed to support farm prices. The same is true of excess production (availability) of any

7 6SOURCE: Gupta, Aparna. “We burn our sold products !” Times News Network


item viz. sugar in Cuba, coffee in Brazil, other farm products in different countries of the World from

time to time. Thus, excess of anything is an unmitigated nuisance. Overproduction lower global

demand and falling pries have caused glut in certain ‗farm oasis.‘ As mentioned in a World socialist

website, there is no solution to the farm crisis, however, within the framework of the capitalist market.

―A fundamental contradiction under the profit system is the accumulation of vast surpluses of

agriculture commodities which cannot be sold at a profit, side by side with, on a World scale,

enormous unmet social needs for food, clothing, and raw materials. Children starve in Africa and

India while American farmers go bankrupt for lack of buyers. This contradiction can only be

resolved when agriculture is integrated into a reorganized world economic system in which rational

planning, not private profit, is the driving force8.”

2.10 PRICING OF MONEY IN SWITZERLAND

What happens to products in physical form as mentioned above, happens to money in Switzerland and

in few other countries. Interest rates represent the price of money (loanable funds). Money from all

parts of the World flows into Switzerland. The bankers are not in a position to absorb the inflow and

deploy them into productive use. Hence, the Swiss Government from time to time identifies negative

interest rate policy as an effective strategy to tide over the crises. According to Bloomberg site, dated

1st December, 2011 the Swiss Government was thinking of capital control and negative interest rates as

possible tools for deployment. In recent times, the sovereign debt crises in Europe and the US debt

burden have prompted investors to move to safe assets such as the Swiss - Franc, the Japanese Yen and

gold. This is not the first time negative interest rates are surfacing as part of an instrument of monetary

policy. In the 70‘s the Swiss bank imposed negative interest rates on foreign accounts to deter inflows

and in 2008 short-term Swiss market rates turned negative for a brief time. The same scenario

prevailed in Japan in the late 90s. According to the Wall Street Journal February, 2, 2012 investors are

looking for havens where they can park their assets safely and are willing to pay a price for the same.

Negative yields on short term government debt have happened regularly because investors do not see

alternate, safe assets. In January, 2012 Germany sold Euro 3.9 bn of 5 months bill with a negative

8 SOURCE: World Socialist Website 1998-2012.


yield of .0122%.

2.11 IRRATIONAL EXUBERANCE AGAIN – THE STOCK MARKETS - KGN

INDUSTRIES:

On Tuesday, 20th

May, 2008 a circular announced the re-listing of KGN industries and the exchange

circular had initiated a caveat ‗cautioning trading members not to enter orders at unrealistic prices‘.

KGN industries are engaged in the business of trading in agro commodities like castor seeds, edible

oils like soyabean oil, palm oil, non edible oils like petroleum products, lubricants, used oil.

On Wednesday, 21st May, 2008, morning, when the markets opened the KGN scrip sky rocketed from

Rs. 72 to Rs. 55,000 (a 76,288% increase) breaking the previous record of MMTC which was the most

expensive scrip on the bourses at Rs. 27,050. To plug further aberrations the authorities suspended the

trading in the scrip at 12.20 pm as a ―pro-active surveillance measure‖. KGN industries were known

as Royal Finance, till it was delisted in February, 2001 when the last traded price was Rs. 11. However,

on Wednesday, 21st May, 2008 morning, Memon, a businessman who is the main promoter of KGN

industries was worth around Rs. 12 Crores. When the stock prices rose to Rs. 66,000 he was worth Rs.

5,600 Crores (that is to say a mind boggling 46,566% increase in the stock of wealth).

2.12 HERD MENTALITY IN THE STOCK MARKET - HARSHAD MEHTA

Harshad Mehta who came to be known as a big bull was the prime mover of the ACC share which rose

from Rs. 200 to Rs. 9,000 (approx.) on the Bombay Stock Exchange - a 4,400% rise in price (early

1992). The ACC share was expected to reach Rs. 10,000. Mr. Mehta used the replacement cost theory,

as a ploy, to explain the reason for the high level bidding. His contention was that older companies

should be valued on the basis of the opportunity cost principle that is to say the amount of money that

would be needed to establish a similar company. Of course, Mehta‘s illicit methods of manipulating

the stock market were exposed on 23rd

April, 1992 by Ms. SuchetaDalal.

2.13 DEVAS MULTI MEDIA SHARE

Devas Multimedia Share of Rs. 10 rose to Rs. 1 Lakh in 2008 (an absurd but true increase of

9,99,900% increase): It is said that a controversial lucrative contract with ISRO led to such a


staggering valuation. The said contract came under the scanner for review and was cancelled.

However, because of the controversial contract Devas was able to get Rs. 1.14 lakh premium on its

share worth Rs. 10 when it divested stake to Deutsche Telekom in 2008.

2.14 OTHER ACADEMIC ADVANCEMENTS IN FINANCE

There are other academic advancements in the field of finance which is supposed to have greatly

improved decision making processes by bringing objectivity and neutrality to decision making.

However, there is at least one flaw in the diamond. Track records of investors have shown that the

efficient market hypothesis does not always work and once men, supposedly rational animals, become

bulls or bears, irrationality hold the fort and subjectivity and irrational exuberance alongwith herd

mentality, rule the waves. For example: the stock market crashes such as the tragic 1929, (black

Thursday) crash, that triggered the great depression (1930), the October, 1987 crash (black Monday)

which saw the Dow Jones industrial average fall by more than 22% and the Harshad Mehta Scam

(1992) when P/E ratios catapulted to astronomical levels, all defy reason. Even today, P/E ratios of

shares of Indian companies are said to be higher than their counterparts in other continents. According

to a Business Standard study, the average price-to-earnings (P/E) ratio of the 30-scrip Bomaby Stock

Exchange benchmark is currently just above the historical average of 15. However, this is on the

higher side as compared to key world indices. Currently, (March, 2012) the Sensex P/E is 14.81

against the current 15.62., ―The European and US markets are comparatively cheap, trading at a P/E

of 12-13 times earnings for calendar year 2011 and eight to 13 times for CY 11.‖9

9 8 “Sensex remains expensive against world market.” Business Standard 9th March, 2012 .


Exhibit 9

Again, the recent September, 2008 crash of stock markets due to the failure of big

financial institutions in the US and other parts of the World led to the closure of the

stock markets World over. All these aforesaid episodes, events and experiences

remind mankind again and again of irrational exuberance. In the words of John

Maynard Keynes, who had said many years ago, “the heart knows reasons that

reason cannot know”10.

10 Dillard, Dudley. The Economics of John Maynard Keynes: The Theory of a Monetary Economy. Kessinger

Publishing, 1st March, 2005:p. 152

John Maynard Keynes had further said in his general theory of employment, “Speculators may do no harm as

bubbles on a steady stream of enterprise. But the position is serious when enterprise becomes the bubble on

a whirlpool of speculation. When the capital development of a country becomes a by-product of the activities

GLOBAL MELTDOWN - 15TH

SEPTEMBER, 2008

15th September was one of the worst days in the financial history of the World when

the U.S. stock markets plunge was the worst since 2001.

Dow Jones closed below 11,000 for the first time.

Markets in Europe, Asia and Russiacollapsed or were on the brink of a total

breakdown.

The Mumbai Sensex was down from a high of 20,301 on 1st January, 2008 to 13, 531

on 15th September 2008. The lowest was 7697 on 27th October, 2008.

The Financial Tsunami struck the World rather badly and the major investment banks

viz. Lehman Brothers, Merrill Lynch, Bear Sterns and Fannie Mae and Freddie Mac

vanished.Lehman Brothers, a 158-year-old bank filed for federal bankruptcy protection

lost 94% of its market value by 15th September 2008 after record losses from investments

tide to mortgages. Bank of America snapped Merrill Lynch for 50 billion USD in an all

stock transaction.

IMMEDIATE IMPACT: Global stock market capitalization had declined by 41% during2008, from USD 55.2

trillion to USD 32.6 trillion.

The international labour organization (ILO) has predicted loss of 50 million jobs on

worldwide basis.

“The social object of skilled investment should be to defeat the dark forces of time and

ignorance which envelope our future” - John Maynard Keynes (1883-1946).


2.15 FINANCE AS AN ART

To the extent that sentiments, emotions, intangibles and imponderables are brought into the decision

making process, finance can be viewed as an art. When the proportion of domination of irrationality

changes and irrational exuberance prevails, no formulae, however sound, can really help. Hence, the

emergence of a new discipline called behavioural finance, to stem, if not totally avoid, the hazards of

‗irrational exuberance‘.

Exhibit 10

2.16 WARREN BUFFET

Even within this debate on whether finance is an art or a science there is at least one person in the

World who has developed the right balance between skills sets to manage finance both in a scientific

manner and also the artistic way. Warren Buffet has been able to consistently outperform stock markets

for long periods of time and is identified as one of the richest American whose wealth owes it origin

primarily to long term equity investments. Of course, the fact that only a few investors can beat the

market does not offer much credibility to the efficient market hypothesis. Nevertheless, managing the

finances on the stock market and being a successful equity investor requires an understanding of the

science behind the farrago of numbers and the art behind cherry picking in the stock market from an

of a casino, the job is likely to be ill-done.” - The General Theory of Employment, Interest and Money, Atlantic

Publishers &Dist, 1st Jan., 2006:p. 142

BEHAVIOURAL FINANCE

A field of finance which uses psychology based theories to explain irrationality in the stock market.

It is assumed that the information structure and the characteristics of players in the market

systematically influence individual investment decision making as well as market outcomes.

Behavioural finance is a missing link between the assumption of the rational economic man in

economics (efficient market hypothesis included) and the actual behaviour of man which is based

inter-alia on irrationality too. The perfect rational investor / or consumer is an el Dorado par

excellence.

Behavioural finance is an attempt to fill the gap.


assortment of alternative equity or other financial instruments. A wise investor has to be confident as a

rational contrarian rather than part of irrational herd behaviour. Of course, much has been written on

Warren Buffet‘s mode of operation viz. how does he do it? And what is Warren Buffet‘s investing

style? The debate as to whether the field of finance is an art or a science will continue. Management of

Finance is an admixture or hybrid of both, the proportionality of art vis-à-vis science or vice-versa,

being a question of judgement and also constrained and conditioned by style - eventually style is the

man. Whether it‘s a financial analysts or a line manager posit in the role of a decision maker using the

outcome of financial analysis or an investor wanting to maximise wealth in the markets (real estate,

stock, commodity, metals et al.) - wherever one goes or whatever one does, the art and science of

financial management or the science and art of financial management should be a part of the

knowledge base of any individual. Thus, managing money or finance is not applicable with respect to

India INC only. Even if money making is an art one can be an efficient and effective money maker

provided they are well aware of the subject matter of analysis and interpretation of financial

statements. However, so long as human beings are at the helm of affairs of business, the human

element shall continue to be a part and parcel of decision making.

2.17 WALL STREET CRASH (1929) AND GLOBAL MELTDOWN (2008)

In October 1929, Irving Fisher famously proclaimed that stock prices had reached ―a permanently

high plateau‖. Just days later, Wall Street crashed. Further, in November, a well-known Professor from

Yale University issued a fresh prognosis - ―the end of the decline of the stock market will probably

not be long, only a few days more at most‖. Well, the Dow raced to hit its lowest of the century on

July 8, 1932 not returning to the pre-1929 levels until two and a half decades.

There was a report by the IMF on Global Financial Stability in April, 2006 which read as follows:

―There is growing recognition that the dispersion of credit risk by banks to a broader and more

diverse group of investors ... has helped make the banking and overall financial system more

resilient…. The improved resilience may be seen in fewer bank failures and more consistent credit

provision. Consequently, the commercial banks may be less vulnerable today to credit or economic

shocks.‖ It is by now well-known that just two years later the global meltdown sent shockwaves across

the globe, with the chain reaction, following the collapse of the Lehman brothers (September, 2008).


The whole concept of dispersion of credit risk had not made the financial system more resilient. On the

contrary, it has made it more vulnerable to the vagaries and vicissitudes of business. There was a

general mood of depression and uncertainty was the order of the day. In a book by Robert Skidelsky,

he says, ―intellectual failure of the economics profession‖11

is the main cause of the crises. This is

where Keynesian thought makes all the difference. He distinguished between risk and uncertainty.

Risk12

is something which can be captured, in a quantified manner, by assigning probabilities through

cardinal or ordinal values. If managing business was only about risk management, quantitaive

measures alone could help. The cardinal and ordinal values could be addressed. However, life in

general and business too, has to encounter uncertainty which is known as ―unknown probability‖ or

―irreducible uncertainty‖. This uncertainty is intrinsic to capitalism. To that extent mankind is

fatalistic and ―none of us has a precise inkling of what the future has in store.‖ Thus the main flaw in

the new classic economics is the failure to capture uncertainty in financial modelling which is in

vogue. The efficient market hypotheses looks only at risk and all the risks are assumed to eventually

reflect a normal bell curve. The risk is then assumed to be distributed smoothly within the precincts of

the bell curve. However, this is preposterous.

Outcomes of events cannot be captured through a science (statistics) which assumes that most

distributions, if not all, viz. binomial, poisson, chi-square f, t and perhaps many other distributions all

tend towards the normal distribution13

. As mentioned by Harish Damodaran, ―All the modern bank

11 Skidelsky. Robert, Keynes - The Return of the Master, Allen Lane, September, 2009. 12 While tradition approaches distinguish between risk and uncertainty in statistical lingo and modern

management try to understand volatility, uncertainty, complexity and ambiguity in its combined format as VUCA yet the hard fact is risk entails the chance of ‘loss of capital’, willingness and ability to bear loss of capital is risk.

13 Approximately normal distributions occur in many situations, as explained by the central limit theorem. When

the outcome is produced by a large number of small effects acting additively and independently, its distribution will be close to normal. The normal approximation will not be valid if the effects act multiplicatively (instead of additively), or if there is a single external influence which has a considerably larger magnitude than the rest of the effects.

I can only recognize the occurrence of the normal curve — the Laplacian curve of errors — as a very abnormal phenomenon. It is roughly approximated to in certain distributions; for this reason, and on account for its beautiful simplicity, we may, perhaps, use it as a first approximation, particularly in theoretical investigations. — Pearson (1901) Measurement errors in physical experiments are often modeled by a normal distribution. This use of a normal distribution does not imply that one is assuming the measurement errors are normally distributed,


risk management models (including the disastrous Black-Scholes option pricing formula) based

themselves on “normal distribution‖,ignoring the possibility of extreme events. Small wonder, they

failed and landed us in the mess we are in, from which we are, hopefully, now emerging.‖ Hence, it

is necessary to remember that management of finance is not mere formulae driven. Such a learning

would make information evaluators and decision makers cogs in a wheel and compel ‗opertaion

robots‘. Human assets are rendered defunct pro tanto. Thus, it is necessary to note that formulae are

only a mariners compass providing direction. Tools and Techniques which facilitate analysis and

interpretation of financial statements are necessary but not sufficient. At best these tools and

techniques are like a star which helps to steer the ship of enterprise.

―And all I ask is a tall ship, And a star to steer her by‖ - John Masefield

However the challenges of decision making have to be assumed by human beings. As well said by

Dr. K. S. Basu,

―By its very definition decision-making starts where formulae end and where judgement has to be

exercised, the imponderable has to be evaluated the intangible has to be assessed.‖

Trends in Finance is an attempt to study the following:

relationship between different items in terms of the proportions they bear to the totals

(income) in the case of profit and loss account and total assets / liabilities in the case of

balance sheet

indexation of key items in the principal financial statements viz. profit and loss account and

balance sheet

graphical presentation for visual exhibition of the trends in key parameters

rather using the normal distribution produces the most conservative predictions possible given only knowledge about the mean and variance of the errors.


thinking of the academic world, as presented in 29 papers and3 theses, across the seven

continents on different aspects of financial management viz. leverage, capital structure,

capital budgeting, cost of capital, dividend policy and corporate financial decisions.

Again trends in finance attempts to capture relationship between different factors indicated in

Exhibit 7. The end results, namely ROE on a book profit and cash basis, which are known in

statistical parlance as ‗dependent variables‘ are studied for their dependency on the different

factors indicated in Exhibit 7. A knowledge of the relationships between these different

factorshelps to guide management in formulating various strategies and concerned policies

which can provide answers to the following questions:

Given a target ROE (dependent variable) what is the extent of control enterprise have on the

factors (independent variables) combining to contribute to the target after knowing the

sensitivity of the independent variables and their prowess to respond positively to

management‘s target accomplishment.

In the alternative given the sensitivity of the factors (independent variables) contributing to

the target how should management practice target setting exercise.

There are sections in this study:

SI – analysisusing RBI database (1956 to 1996) – financials of medium and large public limited

companies

II – analysis using CMIE database (1993 to 2013)– financials of 5 sectors viz. manufacturing,

mining, electricity, construction and real estate and non-financial.

III – a review of research papers in the area of corporate finance published in peer reviewed,

globally recognised, Journals in the area of finance and accounting spanning the globe.

A separate study has been conducted in this behalf in the US regarding the focus of researches and

top research Journals in the US in the area of Finance as shown below in Table. It can be observed

from the table that researchers and research journals are focusing attention in the main on asset

pricing theories, capital market efficiency, term structure of interest rates and inflation option theory


in that order.These journals have focussed their attention to 16 topics excluding a category called

‗other‘ as shown in Table below:

Table 2.1 Focus Areas for Research in Finance- Researchers and Journal

FOCUS AREAS FOR RESEARCH IN FINANCE- RESEARCHERS AND JOURNAL

An Overview

All Nos. Are in Percentage (%) Focus of Researchers on Research

Areas

Focus of Important

Journals on Different Research

Areas Research Areas

Asset Pricing Theories 8.07 7.6

Capital Markets Efficiency 7.82 7.5

Capital Structure and The Cost of Capital 4.72 4.3

Option Theory 6.11 6.0

Finance and Economic Theory 5.13 5.3

Term Structure of Interest Rates and Inflation 6.78 6.8

Related Topics in Information Economics 5.27 4.5

International Finance 5.36 5.8

Mergers, Bankruptcy and Re-organisation 3.48 3.5

Dividend Policy 2.85 2.7

Portfolio Selection and Performance 3.84 4.0

Research and Education in Finance 2.1 2.6

Futures Markets 2.69 2.6

Taxation and Regulations 4.04 3.8


Preference Models and Preference Under Uncertainty 6.8 7.0

Agency Theory 2.03 1.8

Others 22.91 24.3

Total 100 100

N.B.: The above findings are based on a research on 1840 research papers published

in leading research journals in the US viz. Journal Of Finance, Journal Of Financial

and Quantitative Analysis, Journal of Business Finance and Accounting, Financial

Analysts Journal over the ten years period (1980-89) on 16 research areas excluding a

category called 'others'.

It will be interesting for future researches to conduct a study of the above nature with respect to

India and assess the position w.r.t. the focus of researchers and peer reviewed research journals in

the area of finance and accounting.

However a word of caution is in order, using the historic experience of the 1929 October stock

market crash in the US, the global meltdown of 2008 so fresh in the memories of the whole world.

Hence it is not caution but abundant caution which must guide management of finance in all walks

of life in the broader interest of the society at large without disturbing entrepreneurial boldness,

imagination and initiative.



SECTION – I

3-RESERVE BANK OF INDIA (RBI) DATA ANALYSIS- MEDIUM AND

LARGE PUBLIC LIMITED COMPANIES IN INDIA FROM 1950-51 TO

1996-97

Mr. Pushkar Parulekar, Assistant Professor, DR VN BRIMS

3.1 AN – OVERVIEW

This section has explored has explored through the Reserve Bank of India(RBI) database from

1950-51 to 1997-98 a study of the following aspects governing financial management of large and

medium sized public limited companies of India INC. Thus, the study addresses the following

aspects of financial management:

1. The profit and loss account and balance sheet of India INC in an alternate format viz.

common size statement indicating the proportions which various items bear to the total

assets, liabilities and total income of the respective years concerned financial statement.

Total Income has been equated to 100 and the other relevant important factors are expressed

This section analyses , Reserve Bank of India (RBI) data-

Medium and Large Public Limited Companies in India from

1950-51 to 1996-97 through following methods :

Common size Financial Statement (Profit and Loss

Account , Balance Sheet)

Indexation of the Financial Statements

Graphical Analysis

Regression Analysis


as a number relative to Total income. Similarly Total Assets and Liabilities are equated to

100 and other major components of Assets and Liability side are expressed as a percentage

to total. The above analysis are being done starting year 1950-51 at a frequency of every ten

years till 1990-91. Last time frame is of 6 years.(i.e. from 1990-91 to 1996-97).

2. The indexation of the financial statements viz. the profit and loss account and balance sheet

of India INC by assuming 1950-51 year as the base year equal to 100. Thus, over the period

interval of 10 years the growth in the individual items of assets / liabilities as well income /

expenses can be easily identified. Last time frame is of 6 years.(i.e. from 1990-91 to 1996-

97). Thus, over the time period of 10 years the extent of growth in the individual items of

assets / liabilities as well income / expenses can be easily identified.

3. The financial statements have also been presented using the fixed variable cost classification

after careful consideration of the behavior of individual item of expense to enable the

computation of important profit planning indicators like PV ratio, Margin of Safety (MOS),

and other related indicators.

4. The result resource ratio (Return on Investment i.e. ROI) from various angles viz. Return on

Equity (ROE), Return on Capital Employed(ROCE) and its components mainly the profit

margin ratio as well as the asset turnover ratio have also been computed to facilitate

observation of the trend of the said ratios.

5. With a view to generate authentic and reliable information from the database so as to add to

our knowledge on the behavior as well as interplay of various financial parameters like

ROE, Net Profit Margin(NPM), Asset Turnover Ratio(ATR), Debt to Equity (Capital

Employed to Net worth i.e. CE to NW), PV ratio, MOS, Profit before Tax (PBT) / Earnings

Before Interest and Tax (EBIT) and Tax leverage a rigorous statistical analysis was

performed using the Multiple Regression analysis along with the testing for authenticity

through confidence level measurement technique viz. F-test and R2. The above analysis

have helped to identify answers to the following questions:

Given ROE on the left hand side of an equation and other parameters like NPM,

ATR and CE to NW on the right hand ratio through the following equation ROE

(Y) = -0.19 (α)+ 2.59*Net Profit Margin (NPM)(X1) +0.08* Asset turnover ratio

(ATR) (X2) +0.04*Capital Employed to Net worth (CE to NW) (X3) the extent of


the sensitivity of ROE, the dependent variable (Y), has been ascertained and

quantified.

There are 10 equations in all which include six equations relating to ROE and four

equations on ROCE on the left hand side on a book / cash profit basis.

On right hand side on independent variables such as NPM, Cash Profit Margin

(CPM), Operating Profit Margin (OPM), Cash Operating Profit Margin (Cash

OPM), ATR, CE to NW, PV Ratio, MOS, Cash MOS, PBT/EBIT, PBT/Cash EBIT,

Tax Leverage have been considered.

The summary of the outcomes of the multiple regression analysis has been finally

presented in a multiplier matrix to provide an overview of the dependency of the left

hand side parameter viz. Return on Equity (ROE) or Return on Capital Employed

(ROCE) either on book profit or cash profit basis and the aforesaid right hand side

parameters.

6. A graphical analysis of the database have also been done to present a visual overview of

certain trends of key parameters Breakeven Point (BEP) Analysis, Profit After Tax

Distribution to Shareholders, Marginal Tax Rate, Gross Profit Margin, Net Profit Margin,

Interest Cost, Long term Debt to Equity Ratio, Salary Cost as a percentage of Total Cost,

Constituents of Current Assets as percentage of Total Assets.


Table 3.1 Common Size Financial Statement Analysis

Number of companies 750 1333 1650 1651 2131 1930

ASSETSGross fixed assets 62 71 73 68 67 65

Land 5 3 2 1 2 2 Buildings 14 14 12 9 9 6

Plant and machinery 37 49 53 49 48 45 Capital work-in-progress 0 0 2 4 5 8 Furniture, fixtures and office equipments 0 0 0 2 1 1

Others 6 6 5 2 2 2 Depreciation 28 29 33 30 26 18

Net fixed assets 34 43 41 37 41 47Inventories 32 31 32 33 24 15

Loans and advances and other debtor balances 14 16 20 23 25 26

Investments 9 5 3 2 5 8Advance of income-tax 3 0 0 0 0 0 Intangible assets 1 0 1 1 1 1Cash and bank balances 7 5 4 4 3 3

TOTAL 100 100 100 100 100 100



CAPITAL AND LIABILITIES

Share Capital Paid-up capital 38 28 22 13 8 7

of which Preference 8 5 2 1 0 0

Reserves and surplus 19 20 16 17 21 34

Provisions 7 7 4 5 2 2

Borrowings 19 29 38 36 43 39Trade dues and other current liabilities 16 16 19 29 26 19

Miscellaneous non-current liabilities 1 0 0 0 0 0

TOTAL 100 100 100 100 100 100

1996-971990-911960-61ITEM 1950-51 1970-71 1980-81

Table 3.2 Common Size P& L account



INCOME

Sales 85.52 94.92 96.05 95.68 94.34 95.73 Increase (+) or decrease(-) in 0.00 0.00 0.00 0.00 0.00 0.00 value of stock of finished goods 0.00 0.00 0.00 0.00 0.00 0.00 and work-in-progress 0.00 3.83 2.01 1.91 1.85 0.59Other income 1.86 1.24 1.74 2.01 3.29 3.19Non-operating surplus(+)/ deficit(-) 0.00 0.00 0.21 0.40 0.52 0.49Closing stock 12.62 0.00 0.00 0.00 0.00 0.00

Total 100.00 100.00 100.00 100.00 100.00 100.00

Profit at various levelsGross profits 8.18 10.12 10.22 9.42 10.61 12.10 Interest 0.60 1.47 3.02 3.68 5.47 5.72Operating profits 7.58 8.64 7.20 5.74 5.14 6.37Non-operating surplus(+)/deficit(-) 0.00 0.00 0.21 0.40 0.52 0.49Profits before tax 6.55 8.64 7.40 6.14 5.66 6.86Tax provision 2.59 3.33 3.09 2.69 1.83 1.91Profits after tax 3.96 5.31 4.31 3.45 3.82 4.95 (a) Dividends 2.44 2.87 1.85 1.25 1.41 1.76 (a) Dividends Preference 0.00 0.32 0.16 0.07 0.01 0.03 (b) Profits retained 1.52 2.12 2.30 2.13 2.40 3.17

ITEM 1950-51 1996-971990-911980-811970-711960-61

3.2 TRENDS OBSERVED THROUGH COMMON SIZE BALANCE SHEET & P& L

ACCOUNT

Paid up capital has gone down indicating lack of fresh issue of equity when compared with

overall growth in the balance sheet.

Use of Debt as a source of finance has gone up.

Resererves and Surplus have increased their weightage in balance sheet.

Gross Fixed Assets have increased their weightage in balance sheet.

Depriciation weightage has reduced in balance sheet.

Current Asset weightage has reduced substanstially in balance sheet.

3.3 DEFINITION OF 'COMPOUND ANNUAL GROWTH RATE - CAGR‟ (CONCEPT

USED IN INDEXING)

The year-over-year growth rate of an investment over a specified period of time.

The compound annual growth rate is calculated by taking the nth

root of the total percentage growth

rate, where n is the number of years in the period being considered.


This can be written as follows:

(Source: www.investopedia.com)

CAGR isn't the actual return in reality. It's an imaginary number that describes the rate at

which an investment would have grown if it grew at a steady rate. You can think of CAGR as

a way to smooth out the returns. (Source: www.investopedia.com)

For example, Gross Fixed Assets (GFA) worth Rs.62 Cr in the year ending March 1951 have

grown to Rs.205 Cr in March 1961 by growing 229%.Similarly, The growth between 1961 to

1971 was 181%. The growth between 1971 to 1981 was 168%. The growth between 1981 to

1991 was 401%. The growth between 1991 to 1997 was 202%.

In this scenario, CAGR would be the ratio of ending value of GFA to beginning value GFA

(Rs.23303 Cr/ Rs.62 = 375) raised to the power of 1/46 (since 1/ No. of years = 1/46), then

subtracting 1 from the resulting number:

375 raised to 1/46 power = 1.138. (This could be written as 375^ (1/46)).

1.138 - 1 = 0.138

Another way of writing 0.138 is 13.8%.

Thus, CAGR for GFA over the period of 46 years was equal to 13.98%, representing the

smoothed annualized gain in GFA.

http://www.investopedia.com/

http://www.investopedia.com/


Table 3.3 Indexing Financial Statement- Balance Sheet

Number of companies 750 1333 1650 1651 2131 1930CAPITAL AND LIABILITIESShare Capital Paid-up capital 38 81 174 306 926 2386 9.4%Ordinary 30 68 155 284 907 2296

Preference 8 13 19 22 19 90

Reserves and surplus 19 56 128 395 2374 12067 15.1%

Provisions 7 20 30 108 208 626 10.4%Borrowings 19 82 298 815 4967 13869 15.3%Trade dues and other current liabilities 16 47 152 655 3028 6902 14.0% Sundry creditors 0 0 111 441 1755 4419 Others 0 0 41 189 507 660 Miscellaneous 0 0 0 0 0 0 non-current liabilities 1 1 1 1 4 0 TOTAL 100 287 784 2280 11507 35852 13.6%

CAGR over 46

years1996-971990-911960-61ITEM 1950-51 1970-71 1980-81



ASSETSGross fixed assets 62 205 576 1541 7726 23303 13.8%

Land 5 8 13 30 247 605 Buildings 14 40 94 199 995 2277 Plant and machinery 37 140 411 1128 5512 16196 Capital work-in-progress 0 0 14 90 588 3007 Furniture, fixtures and office equipments 0 0 0 39 171 433 Others 6 17 43 55 212 785Depreciation 28 82 256 689 2974 6538 12.6%

Net fixed assets 34 123 319 852 4753 16765 14.4%Inventories 32 89 250 762 2792 5368 11.8%Loans and advances and other debtor balances 14 45 156 515 2917 9206 15.1%Investments 9 14 20 40 589 2951Advance of income-tax 3 0 0 0 0 11Other assets 1 3 8 23 70 471Cash and bank balances 7 13 31 89 386 1082 11.7% TOTAL 100 287 784 2280 11507 35852 13.6%

CAGR over

46 years

1980-81 1996-971990-911960-61ITEM 1950-51 1970-71

Table 3.4 Profit and Loss Account



INCOME

Sales 85.5 246.1 711.5 2527.2 10020.3 24123.8 13.0%CAGR 11.1% 11.2% 13.5% 14.8% 15.8% Increase (+) or decrease(-) in 0.0 0.0 0.0 0.0 0.0 0.0 value of stock of finished goods 0.0 0.0 0.0 0.0 0.0 0.0 and work-in-progress 0.0 9.9 14.9 50.4 196.3 149.7Other income 1.9 3.2 12.9 53.1 349.4 804.4 14.1%Non-operating surplus(+)/ deficit(-) 0.0 0.0 1.5 10.6 55.5 122.5Closing stock 12.6 0.0 0.0 0.0 0.0 0.0

0.0 0.0 0.0 0.0 0.0 0.0 Total 100.0 259.2 740.8 2641.3 10621.4 25200.3 12.8%CAGR 10.0% 11.1% 13.6% 14.9% 15.5%Total Cost 91.8 233.0 665.0 2392.6 9494.6 22151.4 12.7%CAGR 9.8% 11.1% 13.7% 14.8% 15.2%Profit at various levelsGross profits 8.2 26.2 75.7 248.7 1126.8 3048.9 13.7% Interest 0.6 3.8 22.4 97.1 581.1 1442.6 18.4%Operating profits 7.6 22.4 53.3 151.6 545.7 1606.4 12.3%Non-operating surplus(+)/deficit(-) 0.0 0.0 1.5 10.6 55.5 122.5Profits before tax 6.6 22.4 54.8 162.2 601.1 1728.8 12.9%Tax provision 2.6 8.6 22.9 71.1 194.9 480.6 12.0%Profits after tax 4.0 13.8 31.9 91.1 406.3 1248.4 13.3% (a) Dividends 2.4 7.4 13.7 33.0 150.0 443.1 12.0% (a) Dividends Preference 0.0 0.8 1.2 1.7 1.3 6.8 (b) Profits retained 1.5 5.5 17.0 56.3 255.0 798.4 14.6%

CAGR over

46 years

1996-971990-911980-811970-711960-61ITEM 1950-51

3.4 TRENDS OBSERVED THROUGH INDEXING BALANCE SHEET & P& L

ACCOUNT

1. Higher CAGR for total income (12.8%) as compared to cost (12.7%)

2. Highest CAGR is interest cost (18.4%) indicating increased use of debt.

3. Above point can be explained as borrowing have gone up at CAGR of 15.3% against total

liabilities CAGR of 13.6%

4. More profits retained as compared to growth in profits

5. Less Provisions for dividends

6. Higher CAGR in Reserves & Surplus.

7. Lower CAGR in inventories & cash as compared total balance sheet.


3.5 GRAPHICAL OBSERVATIONS

Trends observed in the financial management for Medium and Large Public Limited Companies in

India from 1950-51 to 1996-97

3.6 BREAKEVEN POINT (BEP) ANALYSIS

Then BEP as a percentage of Sales & Total Income was calculated. (As shown in table 1.5 and

graph 1.1)

Fixed Cost was assumed to be 30% of the Total Cost for the purpose of the analysis.

Table 1.5

Mean Median Minimum Maximum

% Sales 79.5% 77.7% 70.0% 95.9%

% Total Income 74.4% 74.7% 66.0% 82.1%

Graph 1.1

Over the years BEP as a % of Sales has come down mainly on account of better contribution

margin. Better Contribution margin is due to higher percentage increase in sales as against the

percentage increase in cost.


Table 3.5 Profit after Tax Distribution to Shareholders as equity dividend & saving as retained earnings

Retained Profit as % of PAT 8.3% 73.6% 46.1% 43.0%

Dividend Paid as % PAT 26.1% 90.3% 51.7% 53.5%

Minimum Maximum Average Median

(Other than these two preferences dividend was the third element where profit was distributed)

There is shift from paying dividends in favor of retained earnings. This show over the year‘s

companies saw more opportunities for growth. Hence considering the reinvestment opportunities

they retained distributable profits rather than distributing dividends.

Graph 3.6 Dividend and Retained Earnings


Table 3.7 Marginal Tax Rate

Minimum 18.4%

Maximum 60.5%

Mean 42.7%

Median 43.8%

Reduction in tax rate indicating more money in the hands of corporate to expand. It also indicates

less government intervention.

Graph 3.8 Reduction in tax rate indicating year wise

Higher Tax Rate meant lesser incentive to show higher Book Profit. So it made sense for India INC

to show have higher Cash Profit,( i.e. PAT+ Depreciation ) by charging higher rates of depreciation

on fixed assets as shown in the next graph.

Also PAT or the book profit is looked at more keenly by non-promoter equity investors but there

were limited avenues to raise money by the way of equity. So there was limited incentive for most

companies to show higher book profits. These facts are augmented by the increase in net profit &

gross profit margin over the years. Particularly in Post liberalization era when equity as source of

finance opened up in big way. This is seen from the debt to equity graph which has dipped

drastically from 1990-91 onwards.


Table 3.9 Depreciation as a percentage of Gross Block

Mean 41.5%

Median 42.0%

Minimum 27.8%

Maximum 48.4%

Graph 3.10 Percentage depreciation charged by Indian INC

Over the years lower depreciation is charged by Indian INC has gone down as there was more

incentive to show Book Profit rather than keeping it as Cash Profit.

Table 3.11 Gross Profit Margin

Time Frame 1950-51 to 1996-97 1950-51 to 1990-91 1991-92 to 1997-98

Mean 10.0% 9.6% 12.5%

Median 9.8% 9.6% 12.1%

Minimum 7.2% 7.2% 11.4%

Maximum 14.2% 11.4% 14.2%


Graph 3.12 Gross Profit Margin has improved drastically in post liberalization years

Table 3.13 Net Profit Margin

Time Frame 1950-51 to 1996-97 1950-51 to 1990-91 1991-92 to 1997-98

Mean 3.9% 3.6% 5.5%

Median 4.0% 3.7% 5.2%

Minimum 1.4% 1.4% 3.7%

Maximum 7.8% 5.6% 7.8%

Net Profit Margins have shown similar trend to GPM‘s. Increase in margins was mainly on account

of cost reduction in salary cost. This could have been due to better productivity and more use of

technology.


Graph 3.14 Net Profit Margins

Table 3.15 Interest Cost

Parameter Mean Median Minimum Maximum

Interest Cost as a percentage of Sales 3.4% 3.2% 0.7% 7.0%

Interest Cost as a percentage of Gross Profit 34.3% 33.9% 6.8% 70.6%

Interest Cost has gone up indicating clear shift from equity to debt as a source of capital. Same can

be substantiated by the next graph of debt to equity ratio.

Graph 3.16 Interest Cost


Table 3.17 Long term Debt to equity Ratio

Mean 0.93

Median 0.96

Minimum 0.34

Maximum 1.58

There is clear shift in favor of debt by the Indian Corporate over the years. It could be due to the

fact that cost of debt or interest rates would have gone down over the years. However as per

www.allbankingsolutions.com benchmark bank rate went from 3.5% in 1950-51 to 11% in 1990-

91. So there was no incentive to take the debt in terms of reduction in interest cost.

The reasons for preference of leverage could be:

Earning Power could be more than cost of debt

Cost of Equity might be higher than Debt

Limited scope of equity as a source of capital

Interest rates could be expected rise over the years so

take loan as early as possible so that cost of debt is

lower


Graph 3.18 Indian Corporate

Table 3.19 Salary Cost as a percentage of Total Cost

Mean 12.9%

Median 13.5%

Minimum 7.5%

Maximum 18.2%

Money spent by Indian Public limited companies on salary as proportion to their total cost have

reduced over the years. This could be due to more use of fixed assets & more automation as the

technology has evolved. The above fact is even more substantiated by the consequent graph which

indicates use of more fixed assets as fraction of total assets and less current assets as a percentage of

total assets.

Reasons for reduction in Salary Cost could be:

Improved Productivity

Lesser Manpower

Technology

Creativity & Innovation

Competition


Graph 3.20 Money spent by Indian Public limited companies on salary as proportion

Graph 3.21 Liquidity to Profitability


Current Assets to Total Assets 0.53 0.53 0.44 0.62

Net Fixed Assets to Total Assets 0.41 0.41 0.31 0.47

Indian companies have shifted from current assets to fixed assets in resource allocation indicating

less focus on liquidity & more focus on profit. The above fact is substantiated with the next graph

which indicates less inventories & cash being held as a fraction of total assets over the years.

This could be due to better collections and more friendly vendors.

They could have leveraged their goodwill in all markets to the advantage for the business.

Aggressive approach to working capital cycle including managing business with negative net

working capital as a strategy.

Graph 3.22 Indian companies have shifted from current assets to fixed assets


Table 3.23 Liquidity to Profitability


Cash to Total Assets 4.2% 3.9% 2.6% 6.7%

Inventories to Total Assets 29.1% 31.1% 15.0% 37.2%

Over the years Indian companies have reduced their cash & inventory levels significantly. That is

augmented by the fact that current ratio has dipped significantly over the years.

Graph 3.24 Cash & inventory levels


Table 3.25 Liquidity to Profitability - Current Ratio

Mean 2.54

Median 2.55

Minimum 1.88

Maximum 3.32

Current Ratio has reduced and replaced by higher ratio of Fixed Assets to Total Assets as shown in

Graph 3.26

Graph 3.26 Current Ratio


Conclusion

1)Over the years Indian Government has supported Indian Industry by easy availability of

debt & reduction in taxes.

2)Promoters have become less conservative and have raised money through debt as a source

of Finance.

3)Promoters have started retaining more profits as they saw more investment opportunities

for their companies.

4)Profitability has improved over the years due to more aggressive policies such as

maintaining less inventory & current ratio.

5)Use of Fresh issue of Equity or of Preference Shares as a fund raising instrument has gone

down.


3.7 REGRESSION ANALYSIS BASED ON CORPORATE FINANCIAL

PERFORMANCE MODEL Figure 3.27 Regression Analysis Based On Corporate Financial Performance Model


3.7.1 Calculations and Assumptions

3.7.2 Calculation of Return on Equity based on book profit (ROE)


ROE is expressed as a percentage indicates net profit returned as a percentage of shareholders

equity. The ROE is useful for comparing the profitability of a company to that of other firms in the

same industry.

PAT is before payment of equity and preference dividend for year N.

Average Equity or Net worth= (Paid-up capital of YearN + Paid-up capital of YearN-1+ Reserves and

surplus of YearN + Reserves and surplus of YearN-1)/2

e.g. PAT for year 1951-52 then Average Equity would consist of average of year 1950-51 and

1951-52.

There were 46 observations of ROE from 1951-52 to 1996-97.

3.7.3 Calculation of Return on Equity based on Cash Profit (Cash ROE)

ROE is expressed as a percentage indicates net profit returned as a percentage of shareholders

equity. The ROE is useful for comparing the profitability of a company to that of other firms in the

same industry.

PAT is before payment of equity and preference dividend and Depreciation for year N.

Average Equity or Net worth= (Paid-up capital of YearN + Paid-up capital of YearN-1+ Reserves and

surplus of YearN + Reserves and surplus of YearN-1)/2

e.g. PAT and Depreciation for year 1951-52 then Average Equity would consist of average of year

1950-51 and 1951-52.

There were 46 observations of Cash ROE from 1951-52 to 1996-97.

3.7.4 Calculation of Return on Capital Employed based on Book Profit (ROCE)

ROCE is expressed as a percentage indicates operating profit returned as a percentage of total

capital employed. The ROCE is useful for comparing the performance of a company to that of other

firms in the same industry.


EBIT is before payment of interest and taxes for year N.

Average Capital Employed= (Total Assets of YearN + Total Assets of YearN-1-Current Liabilities of

YearN - Current Liabilities of YearN-1)/2

e.g. EBIT for year 1951-52 then Average Capital Employed would consist of average of year 1950-

51 and 1951-52.

There were 46 observations of ROCE from 1951-52 to 1996-97.

3.7.5 Calculation of Return on Capital Employed based on Cash Profit (Cash ROCE)

Cash ROCE is expressed as a percentage indicates (Operating profit + Depreciation) returned as a

percentage of total capital employed. The ROCE is useful for comparing the performance of a

company to that of other firms in the same industry.

EBIT is before payment of interest and taxes and depreciation for year N.



e.g. EBIT and Depreciation for year 1951-52 then Average Capital Employed would consist of

average of year 1950-51 and 1951-52.

There were 46 observations of ROCE from 1951-52 to 1996-97.

3.7.6 P/V Ratio (PV Ratio)

Contribution Margin = Sales- Variable Cost

Assumptions made: Raw material, components stores and spare consumed, power and fuel, Selling

Commission, Advertisement were taken as variable cost.

Based on RBI data from 1950-51 to 1980-81 it was assumed variable cost is 70% of the total cost.

There were 46 observations of P/V Ratio from 1951-52 to 1996-97.

3.7.7 Margin of Safety based on book profit (MOS)


There were 46 observations of MOS from 1951-52 to 1996-97.

3.7.8 Margin of Safety based on cash profit (Cash MOS)

There were 46 observations of Cash MOS from 1951-52 to 1996-97.

3.7.9 Turnover Ratio (ATR)

Sales are for year N.



e.g. Sales for year 1951-52 then Average Capital Employed would consist of average of year 1950-

51 and 1951-52.

There were 46 observations of ATR from 1951-52 to 1996-97.

3.7.10 Financial Leverage

There were 46 observations of PBT/EBIT from 1951-52 to 1996-97.

There were 46 observations of PBT/ Cash EBIT from 1951-52 to 1996-97.

There were 46 observations of CE/NW from 1951-52 to 1996-97.

3.7.11 Tax Impact or Tax Leverage


There were 46 observations of PAT/PBT from 1951-52 to 1996-97.

3.7.12 Net Profit Margin based on Book Profit

There were 46 observations of NPM from 1951-52 to 1996-97.

3.7.13 Net Profit Margin based on Cash Profit

There were 46 observations of Cash NPM from 1951-52 to 1996-97.

3.7.14 Operating Profit Margin based on Book Profit

There were 46 observations of OPM from 1951-52 to 1996-97.

3.7.15 Operating Profit Margin based on Cash Profit

There were 46 observations of Cash OPM from 1951-52 to 1996-97.

3.7.16 Regression Analysis

In statistics, regression analysis is a statistical process for estimating the relationships among

variables. The focus is on the relationship between a dependent variable and one or more

independent variables.

If there is just one independent variable (X) then it could simple linear regression In that case a

straight line explains relationship between dependent and independent variable(Y). I.e. Y = α+β1X

(Meaning Y is a function of X)

α = Constant Term (Y when X =0)

β1 = Slope (Beta coefficient) for X (i.e. for unit change in X1 Y will change β1 times)

However in case of multiple linear regressions there is more than one independent variable.

Y= α+β1X1+ β2X2+……. + βnXn


Where,

α = Constant Term (Y when X1= X2= X3=0)

β1 = Slope (Beta coefficient) for X1 (i.e. for unit change in X1 Y will change β1 times)

β2 = Slope (Beta coefficient) for X2 (i.e. for unit change in X2 Y will change β2 times)

βn = Slope (Beta coefficient) for Xn (i.e. for unit change in Xn Y will change βn times)

There were 10 multiple regressions carried out. List of Independent and Dependent variables are as

follows:

Table 3.28 Return on Equity (ROE)

Y X1 X2 X3 X4 X5 X6

1 ROE NPM ATR CE to NW

2 Cash ROE Cash NPM ATR CE to NW

3 ROCE OPM ATR

4 Cash ROCE Cash OPM ATR

5 ROCE PV Ratio MOS ATR

6 Cash ROCE PV Ratio Cash MOS ATR

7 ROE PV Ratio MOS ATR PBT/EBIT CE/NW Tax Leverage

8 Cash ROE PV Ratio Cash MOS ATR PBT/Cash EBIT CE/NW Tax Leverage

9 ROE ROCE PBT/EBIT CE/NW Tax Leverage

10 Cash ROE Cash ROCE PBT/EBIT CE/NW Tax Leverage

Dependent

VariableFunction of Independent Variables

In case 1 of above analysis Return on Equity (ROE) is being considered as a dependent variable on

independent variables which are Net Profit Margin, Asset Turnover Ratio and Capital employed to

Net worth.

I.e. Y is Function of (X1, X2 , X3)

Y= Return on Equity (Dependent Variable)

X1= Net Profit Margin (Independent Variable 1)

X2= Asset Turnover Ratio (Independent Variable 2)

X3= Capital employed to Net worth (Independent Variable 2)

So, Y= α+β1X1+ β2X2+ β3X3

3.7.17 Output of Regression Analysis

Regression Statistics


Multiple R 0.97

R Square 0.95

Adjusted R Square 0.94

Standard Error 0.01

Observations 46

Multiple R =0.97

Multiple R is Karl Pearson‘s coefficient of correlation. Number can be between -1 to +1. A number

close to +1 as in the above case indicates very strong correlation between dependent and

independent variable.

R Square =0.95 and Adjusted R Square =0.95

Adjusted R-square is a modification of R-square that adjusts for the number of terms in a model. R-

square always increases when a new term is added to a model, but adjusted R-square increases only

if the new term improves the model more than would be expected by chance. Since this a multiple

linear regression adjusted R square would be considered.

Significance of Adjusted R Square =0.95

R square can take any value between 0 to 1. (i.e.0 to 100%). R square is explained variation in

dependent variable due to independent variable. Adjusted R Square =0.95 indicates 95% of the

variation in Y i.e. ROE is explained by the independent variables considered. i.e. NPM (X1), ATR

(X2) and CE to NW (X3)

Standard Error = 0.01

The smaller the standard error, the more representative the sample will be of the overall population.

The standard error is also inversely proportional to the sample size; the larger the sample size, the

smaller the standard error because the statistic will approach the actual value.

Since the standard error is 0.01 sample of 46 observations can be considered to be consistent with

the population.

Observations = 46

Sample size = Observations =46. More the number better is the predictability towards the

population.

Table 3.29 ANOVA table

http://en.wikipedia.org/wiki/Karl_Pearson


Df SS MS F Significance F

Regression 3.00 0.04 0.01 250.16 0.00

Residual 42.00 0.00 0.00

Total 45.00 0.04

Regression df =3

df indicates degree‘s of freedom. In this case there are three independent variables which can take

the values independent of each other hence degree‘s of freedom is three.

Residual df = 42

Residual = Sample size - 1 – df

R square = 1- (Residual Sample Square / Total Sample Square)

Regression SS =0.04

These are the sum of squares of values of Y calculated using Y= α+β1X1+ β2X2+ β3X3 as per the

model.

Residual SS =0.002 (close to 0)

It is the difference between calculated value and actual value of Y.

Regression MS = 0.01

Residual MS = 0.005% (close to 0)

F statistics = 250.16 and its significance.

The column labeled F gives the overall F-test of,

Null Hypothesis, H0: β1 = 0, β2 = 0, β3 = 0 versus

Alternate Hypothesis, Ha: at least one of β1,β2 and β3 does not equal zero.


F value calculated using FINV (F, 3, 42) at F =99.5% (i.e. confidence limit) we get Significance F

at 0.0236.

Since 0.0236 > 8.3030212047683E-27 (Close to 0) we will reject the null hypothesis.

Hence one can say with 99.5% confidence that at least one of the 3 independent variables will have

non-zero slope or the non-zero multiple with respect to dependent variable.

Table 3.30 Coefficient Matrix

Coefficients Standard Error t Stat P-value

Lower 95%

Upper 95%

Intercept -0.19 0.01 -15.90 0.00 -0.21 -0.17

NPM 2.59 0.10 26.59 0.00 2.40 2.79

Asset Turnover

0.08 0.01 12.81 0.00 0.06 0.09

CE to NW 0.04 0.00 10.76 0.00 0.04 0.05

From the above table one can say,

ROE (Y) = -0.19 (α) + 2.59*Net Profit Margin (NPM) (X1) +0.08* Asset turnover ratio (ATR) (X2)

+0.04*Capital Employed to Net worth (CE to NW) (X3)

i.e. β1=2.59, β2=0.08 and β3=0.04 and α =-0.19

i.e. For every 1% rise in NPM, ROE will go up by 2.59% assuming ATR and CE to NW remain

constant.

For every 1 time rise in ATR, ROE will go up by 0.08% assuming NPM and CE to NW remain

constant.

If all three i.e. NPM, ATR and CE to NW are zero then ROE will be -19% (i.e. intercept with y

axis)

Standard error is close to zero indicating close to 100% fit.

t-stat is coefficient divided by standard error. It is compared with p value close to 0 indicates that

with close to 100% confidence one can say dependent variable is dependent on each of the three

independent variables.

i.e. With very close to 100% confidence one ROE is dependent on NPM, ATR and CE to NW.

T-stat and p value are not relevant for α.


Lower 95% andUpper 95%: This gives values for lower and upper end of respective independent

variables and the intercept with 95% values being covered between the ranges.

It assumes all these variables to be normally distributed with mean μ and standard deviation σ.

Values are (μ + 2* σ)

Table 3.31 Correlation Matrix

ROE NPM ATR CE to NW

ROE 1.00

NPM 0.63 1.00

ATR 0.20 -0.54 1.00

CE to NW 0.21 -0.48 0.52 1.00

Observations

Every variable dependent/independent has 1 as Karl Pearson‘s coefficient of correlation

with itself.

ROE is positively correlated with NPM, ATR and CE to NW but it is more positively

correlated with NPM at 0.63 as compared to 0.20 for ATR 0.21 for CE to NW.

Increase in CE to NW will lead to reduction in NPM; this can be due to increased interest

cost. (CE= NW + Debt)

As incremental debt would increase the interest outflow in absolute terms.

Also cost of debt increases as level of debt increases.

Increased interest cost would lead to reduced net profit and consequently net profit margin.

So a firm cannot have infinite leverage to increase CE to NW and hence the ROE as the

impact would be countered by reduction in NPM.

Increase in ATR will lead to reduction in NPM this can be due to low margin and more

volume approach by the company.

Similar analysis was carried out in the other nine cases and these are the summary of outputs for

them,

Table 3.32 Cash ROE as a function of CPM, ATR and CE to NW

Cash ROE=-0.36+0.13*ATR+2.48*CPM+0.10*(CE/NW)

http://en.wikipedia.org/wiki/Karl_Pearson


SUMMARY OUTPUT Correlation Matrix

Regression Statistics Cash ROE ATR CPM CE to NWMultiple R 0.98 Cash ROE 1.00

R Square 0.97 ATR 0.50 1.00Adjusted R Square 0.97 CPM 0.15 -0.66 1.00Standard Error 0.01 CE to NW 0.79 0.52 -0.28 1.00Observations 46.00

ANOVA

df SS MS F Significance F

Regression 3.00 0.09 0.03 445.87 0.00Residual 42.00 0.00 0.00Total 45.00 0.09

Coefficients Standard Error t Stat P-value Lower 95% Upper 95%Intercept -0.36 0.02 -20.75 0.00 -0.39 -0.32

Asset Turnover 0.13 0.01 16.22 0.00 0.12 0.15Cash Profit Margin 2.48 0.12 21.43 0.00 2.25 2.72CE to NW 0.10 0.00 21.05 0.00 0.09 0.10

Table 3.33 ROCE as a function of OPM and ATR

ROCE=-

0.12+1.2*OPM+0.10*ATR


Regression Statistics ROCE OPM ATR

Multiple R 0.99 ROCE 1.00

R Square 0.99 OPM 0.57 1.00

Adjusted R Square 0.99 ATR 0.64 -0.26 1.00

Standard Error 0.00Observations 46.00

ANOVA




OPM 1.20 0.02 49.66 0.00 1.15 1.25Asset Turnover 0.10 0.00 53.40 0.00 0.10 0.11

Table 3.34 Cash ROCE as a function of Cash OPM and ATR

Cash ROCE=-0.16+1.21*Cash OPM+0.13*ATR



Regression Statistics Cash ROCE Cash OPM ATRMultiple R 1.00 Cash ROCE 1.00

R Square 0.99 Cash OPM 0.46 1.00Adjusted R Square 0.99 ATR 0.68 -0.33 1.00

Standard Error 0.00Observations 46.00

ANOVA



Coefficients Standard Error t Stat P-value Lower 95% Upper 95%

Intercept -0.16 0.01 -29.96 0.00 -0.17 -0.15Cash OPM 1.21 0.03 48.12 0.00 1.16 1.26Asset Turnover 0.13 0.00 58.33 0.00 0.13 0.14

Table 3.35 ROCE as a function of PV Ratio, MOS and ATR

ROCE= -0.51+1.26*PV Ratio+0.18*MOS+0.1*ATR


Regression Statistics ROCE PV Ratio MOS ATRMultiple R 0.99 ROCE 1.00R Square 0.98 PV Ratio 0.52 1.00

Adjusted R Square 0.98 MOS 0.64 0.96 1.00Standard Error 0.00 ATR 0.64 -0.30 -0.16 1.00Observations 46.00

ANOVA




Intercept -0.51 0.08 -6.20 0.00 -0.67 -0.34PV Ratio 1.26 0.26 4.88 0.00 0.74 1.78

MOS 0.18 0.06 3.06 0.00 0.06 0.31Asset Turnover 0.10 0.00 29.96 0.00 0.09 0.11


Table 3.36 Cash ROCE as a function of PV Ratio, Cash MOS and ATR

Cash ROCE=-0.37+0.76*PV Ratio+0.32*Cash MOS+ 0.12* ATR


Regression Statistics Cash ROCE PV Ratio Cash MOS ATR

Multiple R 0.99 Cash ROCE 1.00

R Square 0.98 PV Ratio 0.44 1.00

Adjusted R Square 0.98 Cash MOS 0.56 0.89 1.00

Standard Error 0.00 ATR 0.68 -0.30 -0.20 1.00

Observations 46.00

ANOVA




PV Ratio 0.76 0.16 4.72 0.00 0.44 1.09Cash MOS 0.32 0.03 9.94 0.00 0.25 0.38Asset Turnover 0.12 0.00 34.58 0.00 0.11 0.13

Table 3.37 ROE as a function of PV Ratio, MOS, ATR, CE to NW, PBT/EBIT, Tax Leverage

ROE=-0.15-0.64*PV Ratio+0.59*MOS+0.07*ATR+0.06*(CE/NW)+0.34*(PBT/PBIT)-

0.01*Tax Leverage SUMMARY OUTPUT Correlation Matrix

Regression Statistics ROE PV Ratio MOS ATR CE to NW PBT/EBIT Tax LeverageMultiple R 0.99 ROE 1.00

R Square 0.98 PV Ratio 0.73 1.00Adjusted R Square 0.97 MOS 0.73 0.96 1.00Standard Error 0.00 ATR 0.20 -0.30 -0.16 1.00Observations 46.00 CE to NW 0.21 0.12 0.35 0.52 1.00

PBT/EBIT 0.27 0.20 -0.03 -0.52 -0.84 1.00Tax Leverage 0.53 0.54 0.51 -0.44 0.04 0.39 1.00

ANOVA

df SS MS F Significance FRegression 6.00 0.04 0.01 263.87 0.00Residual 39.00 0.00 0.00Total 45.00 0.04

Coefficients Standard Error t Stat P-value Lower 95% Upper 95%Intercept -0.15 0.17 -0.88 0.38 -0.50 0.20PV Ratio -0.64 0.57 -1.12 0.27 -1.78 0.51

MOS 0.59 0.14 4.22 0.00 0.31 0.87Asset Turnover 0.07 0.01 11.95 0.00 0.06 0.08CE to NW 0.06 0.01 6.77 0.00 0.04 0.08PBT/EBIT 0.34 0.03 11.73 0.00 0.28 0.40Tax Leverage -0.01 0.02 -0.75 0.46 -0.05 0.02

Table 3.38 Cash ROE as a function of PV Ratio, Cash MOS, ATR, CE to NW, PBT/Cash EBIT, Tax

Leverage

Cash ROE=0.28-2.91*PV Ratio+0.96*Cash MOS + 0.10*ATR+ 0.12*(CE/NW)

+0.29*(PBT/Cash PBIT) +0.23* Tax Leverage



Regression Statistics Cash ROE PV Ratio Cash MOS ATR CE to NW PBT/ Cash EBIT Tax LeverageMultiple R 0.99 Cash ROE 1.00

R Square 0.97 PV Ratio 0.50 1.00Adjusted R Square 0.97 Cash MOS 0.65 0.89 1.00Standard Error 0.01 ATR 0.50 -0.30 -0.20 1.00Observations 46.00 CE to NW 0.79 0.12 0.45 0.52 1.00

PBT/ Cash EBIT -0.53 0.01 -0.38 -0.27 -0.89 1.00Tax Leverage 0.28 0.54 0.42 -0.44 0.04 -0.10 1.00

ANOVA

df SS MS F Significance FRegression 6.00 0.09 0.01 231.95 0.00Residual 39.00 0.00 0.00Total 45.00 0.09

Coefficients Standard Error t Stat P-value Lower 95% Upper 95%Intercept 0.28 0.16 1.73 0.09 -0.05 0.60PV Ratio -2.91 0.61 -4.77 0.00 -4.14 -1.67

Cash MOS 0.96 0.13 7.55 0.00 0.70 1.21Asset Turnover 0.10 0.01 9.00 0.00 0.08 0.12CE to NW 0.12 0.02 7.82 0.00 0.09 0.15PBT/ Cash EBIT 0.29 0.04 8.16 0.00 0.22 0.37Tax Leverage 0.23 0.02 10.12 0.00 0.18 0.27

Table 3.39 ROE as a function of ROCE, CE to NW, PBT/ EBIT, Tax Leverage

ROE=-0.21+0.85*ROCE+0.25*(PBT/EBIT) +0.04*(CE/NW) +0.03*Tax Leverage


Regression Statistics ROE ROCE PBT/EBIT CE to NW Tax Leverage

Multiple R 0.99 ROE 1.00

R Square 0.97 ROCE 0.78 1.00

Adjusted R Square 0.97 PBT/EBIT 0.27 -0.32 1.00

Standard Error 0.00 CE to NW 0.21 0.61 -0.84 1.00

Observations 46.00 Tax Leverage 0.53 0.10 0.39 0.04 1.00

ANOVA




Intercept -0.21 0.02 -11.69 0.00 -0.25 -0.17ROCE 0.85 0.04 20.19 0.00 0.77 0.94PBT/EBIT 0.25 0.03 9.51 0.00 0.19 0.30

CE to NW 0.04 0.01 4.71 0.00 0.02 0.06Tax Leverage 0.03 0.01 2.24 0.03 0.00 0.06

Table 3.40 Cash ROE as a function of Cash ROCE, ATR, CE to NW, PBT/ EBIT, Tax Leverage

Cash ROE= -0.28+0.86*Cash ROCE+0.23*(PBT/EBIT)+0.11*(CE/NW)+0.02*Tax Leverage


SUMMARY OUTPUT

Regression Statistics Cash ROE Cash ROCE PBT/EBIT CE to NW Tax LeverageMultiple R 0.99 Cash ROE 1.00

R Square 0.98 Cash ROCE 0.93 1.00Adjusted R Square 0.97 PBT/EBIT -0.41 -0.48 1.00

Standard Error 0.01 CE to NW 0.79 0.73 -0.84 1.00Observations 46.00 Tax Leverage 0.28 0.01 0.39 0.04 1.00

ANOVA




Intercept -0.28 0.03 -10.57 0.00 -0.34 -0.23Cash ROCE 0.86 0.06 13.81 0.00 0.74 0.99PBT/EBIT 0.23 0.04 5.91 0.00 0.15 0.31

CE to NW 0.11 0.01 7.79 0.00 0.08 0.14Tax Leverage 0.02 0.02 0.80 0.43 -0.03 0.06

3.7.18 Summary of 10 equations

3.7.18.1 Multiplier Matrix

Multiplier matrix indicates dependent variable of left hand side is impacted by what magnitude for

a unit change in independent variable on right hand side assuming other independent variables to be

constant.

E.g. 1% increase in NPM will increase ROE by 2.59*1% times= 2.59% assuming ATR and CE to

NW remaining constant.

The extent of sensitivity is indicated by the multiplier number. E.g. ROE when expressed as a

function of NPM,ATR and CE/NW ratio is most sensitive to NPM with a multiplier of 2.59,

followed by ATR at 0.08 and is least sensitive to CE/NW ratio.

Table 3.41 Multiplier matrix

Si

mil

ar

obs

erv

Constant ROCE NPM CPM OPM Cash

OPM

ATR CE to

NW

PV

Ratio

MOS Cash

MOS

PBT/E

BIT

PBT/

Cash

EBIT

Tax

Levera

ge

ROE -0.19 2.59 0.08 0.04

Cash ROE -0.36 2.48 0.13 0.10

ROCE -0.12 1.20 0.10

Cash ROCE -0.16 1.21

ROCE -0.51 0.10 1.26 0.18

Cash ROCE -0.37 0.12 0.76 0.32

ROE -0.15 0.07 0.06 -0.64 0.59 0.34 -0.01

Cash ROE 0.28 0.10 0.12 -2.91 0.96 0.29 0.23

ROE -0.21 0.85 0.04 0.25 0.03

Cash ROE -0.28 0.86 0.11 0.23 0.02


ation are being made

3.7.18.2 Observations

ROI (ROE/ROCE on Book Profit and Cash Profit basis) is more sensitive to margins as

compared to Asset utilization or the capital structure.

Even after generating twice the sales from same assets ROI will not change drastically.

That is because from the investors point of view be it Equity shareholder or debt holder

profit is the key factor.

Higher Sales may not make higher returns; as selling at a profit is more important than just

selling the product or the service.

E.g. Oil Marketing Companies and Aviation Industry. In both these cases sales have gone

up but profits have not gone up at the same rate of growth.

The Margins reflect the overall picture be it NPM or OPM on book profit or cash profit

basis.

Bottom-line is it is important to utilize your assets well and generate sales with a proper

mix of debt and equity in the capital structure. But it is more important to achieve sales

with same or higher profit margins so as to increase the ROI. However above argument is

countered by Economic value added (EVA) concept. EVA says generate sales as long as

operating profit from incremental sales is greater than the cost of capital associated with

it.

SECTION- II

4-CMIE DATA - FIVE SECTORS DATA ANALYSIS VIZ.

MANUFACTURING, MINING, ELECTRICAL, 'CONSTRUCTION AND

REAL ESTATE' AND 'NON-FINANCIAL' SECTORS FROM 1992-93 TO

2012-13 THROUGH „REGRESSION ANALYSIS‟

By Ms. Suman Mathur, Assistant Professor, DR VN BRIMS


4.1 AN OVERVIEW

This section has explored, through the CMIE database from 1992-93 to 2012-13, the following five

sectors viz. Manufacturing, Mining, Electrical, 'Construction and Real Estate' and 'Non-financial'

sectors. The study addresses the following aspects of financial management:

The Profit and Loss (income) statement and balance sheet (assets and liabilities) of

the given sectors in an alternate format viz. common size statement indicating the

proportions which various items bear to the total assets, liabilities and total income of the

respective year's concerned financial statements. Total income has been equated to 100 and

other relevant important factors are expressed as a percentage to total income. Similarly

total assets and liabilities are equated to 100 and other major components of assets and

liabilities are expressed as a percentage for the period. The above analysis is carried out for

a period of 20 years- 1993-94 to 2012-13.

The financial statements have also been presented using the fixed- variable cost

classification after careful consideration of the behavior of individual items of expense to

enable the computation of important profit planning indicators like Profit-Volume (PV)

ratio, Margin of Safety (MOS) and other related indicators leading to return on investment

which includes operating, financial and total management performance for any particular

period.

Thus result resource ratio (Return on Investment i.e. ROI) from various angles viz. Return

on Equity (ROE), Return on Capital Employed(ROCE) and its components, the profit

This section analyses , CMIE data – five sectors data viz.

Manufacturing, Mining, Electrical, 'Construction and Real

Estate' and 'Non-financial' sectors from 1992-93 to 2012-13

through ‗Regression Analysis‘


margin ratio as well as the asset turnover ratio, alongwith other financial indicators just

cited, have also been computed to facilitate study of the trend of the said ratios.

The study of 'Trends in Finance' to generate authentic and reliable information from

the database so as to add to our knowledge on the behavior as well as interplay of various

financial parameters. Thus given ROE, Net Profit Margin(NPM), Asset Turnover

Ratio(ATR), Debt to Equity through the ratio of Capital Employed to Net worth (CE to

NW), PV ratio, Margin of Safety (MOS), Profit before Tax (EBT) / Profit Before Interest

and Tax (EBIT) and tax leverage, and the permutation and combination thereof, a rigorous

statistical analysis was performed using the multiple regression analysis along with the

testing for authenticity through confidence levels measurement techniques viz. F-test and

R2. The above analyses have helped to identify answers to the following questions:

Given ROE on the left hand side of an equation and other parameters like NPM, ATR and CE to

NW on the right hand side through the following equation:

ROE (Y) = -0.33 (α)+ 0.64*Cash Profit Margin (CPM)(X1) +1.41*Asset turnover ratio

(ATR) (X2) +0.03*Capital Employed to Net worth (CE to NW) (X3)

the extent of the sensitivity of ROE, the dependent variable (Y), has been ascertained and

quantified. Thus, there are 10 equations for every sector which include :

(a) six equations relating to ROE on the left hand side on a book and cash profit basis

(b) four equations again on ROCE on left hand side

(c) the independent variables viz. NPM, Cash Profit Margin (CPM), Operating Profit Margin

(OPM), Cash Operating Profit Margin (Cash OPM), ATR, CE to NW, PV Ratio, MOS,

Cash MOS, PBT/EBIT, PBT/Cash EBIT, Tax Leverage, have all been placed on the right

hand side in various permutation and combination.

(d) the summary of the outcomes of the multiple regression analysis has been finally presented

in a multiplier matrix for each sector to provide an overview of the dependency of the left

hand side parameters viz. Return on Equity (ROE) or Return on Capital Employed (ROCE)

either on book profit or cash profit basis and the aforesaid right hand side parameters.

Table 4.1 Cash Profit ROE as a function of CPM, ATR & CE to NW – Manufacturing

ROE(Y)= -0.33+0.64*CPM+1.41*ATR+0.03*(CE/NW)


Table 4.2 Book Profit ROE as a function of NPM, ATR & CE to NW

ROE(Y)= -0.16+0.67*NPM+0.53*ATR+0.02*(CE/NW)


Table 4.3 Cash Profit ROCE as a function of Cash OPM & ATR

ROCE(Y)= -0.06+0.12*CashOPM+0.61*ATR

Table 4.4 Book Profit ROCE as a function of OPM & ATR

ROCE(Y)= -0.05+0.12*OPM+0.45*ATR


Table 4.5 Cash Profit ROE as a function of PV Ratio, CashMOS, ATR, PBT/Cash EBIT & PAT/PBT

ROE(Y) = -0.68+1.58*PV Ratio+2.05*CashMOS-3.24*ATR-0.16*PBT/Cash EBIT +0.04*

(CE/NW) +0.00*PAT/PBT

Table 4.6 Book Profit ROE as a function of PV Ratio, MOS, ATR , PBT/EBIT & PAT/PBT


ROE(Y)= -0.74+1.36*PV Ratio+2.29*MOS-2.77*ATR-0.05*(PBT/EBIT)+0.03*(CE/NW)

+0.00*(PAT/PBT)

Table 4.7 Cash Profit ROCE as a function of PV Ratio, CashMOS & ATR

ROCE(Y) = -0.14+0.34*PV Ratio+0.29*CashMOS+0.14*ATR


Table 4.8 Book Profit ROCE as a function of PV Ratio, MOS & ATR

ROCE(Y)= -0.14+0.28*PV Ratio+0.31*MOS+0.14*ATR

Table 4.9 Cash Profit ROE as a function of EBIT/CE, PBT/EBIT & PAT/PBT

ROE(Y)= -0.04+1.76*(EBIT/CE)+0.22*(PBT/EBIT)+0.00*(PAT/PBT)


Table 4.10 Book Profit ROE as a function of EBIT/CE, PBT/EBIT & PAT/PBT

ROE(Y) = -0.23+4.06*(EBIT/CE)+0.39*(PBT/EBIT)+0.01*(PAT/PBT)

Table 4.11 Cash Profit ROE as a function of CPM, ATR & CE to NW- Mining

ROE(Y)= -0.74+1.20*CPM+0.82*ATR+0.16*(CE/NW)



ROE(Y)= -0.43+1.13*NPM+0.48*ATR+0.10*(CE/NW)

Table 4.13 Cash Profit ROCE as a function of CashPM & ATR




ROCE(Y)= -0.19+0.61*OPM+0.37*ATR

Table 4.15 Cash Profit ROE as a function of PV Ratio, CashMOS, ATR , PBT/CashEBIT & PAT/PBT


ROE(Y) = -0.44+0.09*PV Ratio+0.98*CashMOS+0.66*ATR+0.09*(PBT/CashEBIT)+ 0.00*

(CE/NW) -0.01* (PAT/ PBT)


ROE(Y)= -0.98+0.15*PV Ratio+0.56*MOS+0.51*ATR+0.23*(PBT/EBIT)+0.02*(CE/NW)

+0.49*(PAT/PBT)



ROCE(Y)= -0.01-0.13*PV Ratio+0.60*CashMOS+0.32*ATR





ROE(Y)= -0.09+2.27*(EBIT/CE)+0.04*(PBT/EBIT)-0.23*(PAT/PBT)



ROE(Y)= -0.18+2.59*(EBIT/CE)+0.11*(PBT/EBIT)-0.23*(PAT/PBT)

Table 4.21 Cash Profit ROE as a function of CPM, ATR & CE to NW- Electrical

ROE(Y)= -0.24+0.73*CPM+0.46*ATR+0.05*(CE/NW)



ROE(Y)= -0.11+0.74*NPM+0.22*ATR+0.02*(CE/NW)





ROCE(Y)= -0.07+0.34*OPM+0.23*ATR

Table 4.25 Cash Profit ROE as a function of PV Ratio, CashMOS, ATR , PBT/EBIT & PAT/PBT

ROE(Y)= -0.44+0.51*PV Ratio+0.04*CashMOS+0.56*ATR+0.20*(PBT/CashEBIT)+

0.04*(CE/NW) +0.04*(PAT/PBT)




+0.06*(PAT/PBT)


ROCE(Y)= -0.23+0.32*PV Ratio+0.16*CashMOS+0.43*ATR







Table 2.29




Table 4.31 Cash Profit ROE as a function of CPM, ATR & CE to NW- Construction

ROE(Y)= -0.35+1.69*CPM+0.51*ATR+0.06*(CE/NW)



ROE(Y)= -0.28+0.02*NPM+0.44*ATR+0.03*(CE/NW)





ROCE(Y)= -0.11+0.61*OPM+0.28*ATR

Table 4.35 Cash Profit ROE as a function of PV Ratio,Cash MOS, ATR , PBT/CashEBIT & PAT/PBT

ROE(Y)= -0.53+0.14*PV Ratio+0.40*CashMOS+0.46*ATR+0.17*(PBT/CashEBIT)+0.06*

(CE/NW) +0.06*(PAT/PBT)


Table 4.36 Book Profit ROE as a function of PV Ratio, MOS, ATR, PBT/EBIT & PAT/PBT


+0.07*(PAT/PBT)





ROCE(Y) = -0.26+0.20*PV Ratio+0.43*MOS+0.31*ATR







Table 4.41 Cash Profit ROE as a function of CPM, ATR & CE to NW- Non-Financial Services

ROE(Y)= -0.28+1.69*CPM+0.23*ATR+0.07*(CE/NW)


ROE(Y)= -0.16+0.02*NPM+0.12*ATR+0.04*(CE/NW)



ROCE(Y) = -0.11+0.79*CashOPM+0.19*ATR

Table 4.44 Book Profit ROCE as a function of PM & ATR

ROCE(Y)= -0.08+0.77*OPM+0.15*ATR


Table 4.45 Cash Profit ROE as a function of PV Ratio, CashMOS, ATR , PBT/EBIT & PAT/PBT

ROE(Y)= -0.56+0.64*PV Ratio+0.35*CashMOS+0.14*ATR+0.09*(PBT/CashEBIT)+0.08*

(CE/NW) +0.10*(PAT/PBT)




+0.02*(PAT/PBT)










ROE(Y) = -0.14+1.06*(EBIT/CE)+0.02*(PBT/EBIT)-0.13*(PAT/PBT)

4.2 SUMMARY OF MULTIPLE REGRESSION ANALYSIS OUTCOME

Table 4.51 Manufacturing Sector -Multiplier Matrix


Table 4.52 Mining Sector -Multiplier Matrix


Table 4.53 Electrical Sector -Multiplier Matrix


Table 4.54 Construction -Real Estate Sector -Multiplier Matrix


Table 4.55 Non-Financial Sectors - Multiplier Matrix

Interpretation of Multiple Matrix

Multiplier matrix indicates dependent variable of left hand side is impacted by what magnitude for

a unit change in independent variable on right hand side assuming other independent variables to be

constant.


For example: 1% increase in CPM will increase ROE by 1.69*1% times = 1.69% assuming the

ATR, CE to NW remaining constant (as per the table 2.55).

In the Manufacturing sector ROI is more sensitive to ATR as compared to Margins. This could be

due to the fact that in general manufacturing sector works on lesser margins as compared to services

& is more regulated. Capital structure which is indicated by CE to NW ratio has hardly any

influence on ROI. ROI is least sensitive to capital structure which is consistent Modigliani and

Miller approach. ROI is also sensitive to MOS & PV ratio as compared to margins, ATR or the

capital structure.

In the Mining sector ROI is more sensitive to margin as compared to ATR. Capital structure which

is indicated by CE to NW ratio has hardly any influence on ROI. ROI is least sensitive to capital

structure which is consistent Modigliani and Miller approach. ROI is also sensitive to MOS as

compared to its sensitivity with respect to ATR & capital structure.

In the Electricity sector ROI is more sensitive to margin as compared to ATR. Capital structure

which is indicated by CE to NW ratio has hardly any influence on ROI. ROI is least sensitive to

capital structure which is consistent Modigliani and Miller approach. ROI is relatively less sensitive

to MOS as compared to its sensitivity with respect to ATR & margins.

In the Construction- Real Estate sector ROI is more sensitive to ATR as compared to margins only

exception being Cash ROE & CPM. Capital structure which is indicated by CE to NW ratio has

hardly any influence on ROI. ROI is least sensitive to capital structure which is consistent

Modigliani and Miller approach. ROI is relatively more sensitive to MOS as compared to its

sensitivity with respect to ATR & margins.

In the Non- Financial services sector ROI is more sensitive to margin as compared to ATR. Capital

structure which is indicated by CE to NW ratio has hardly any influence on ROI. ROI is least

sensitive to capital structure which is consistent Modigliani and Miller approach. ROI is also

sensitive to MOS as compared to its sensitivity with respect to ATR & capital structure.

4.5 COMPARISONS BETWEEN THE STUDIES DONE ON RBI (SECTION I ) AND

CMIE (SECTION II) DATA

4.5.1 Factors Common to RBI & CMIE data for 5 industries

Sales represent effectiveness and profits measure effectiveness and efficiency.

From ROI perspective both effectiveness and efficiency are important.


ROI is more sensitive to margins as compared to ATR or the leverage ratios for both pre and

post liberalization era.

4.5.2 Difference in RBI & CMIE data for 5 industries

In the post liberalization era sensitivity of ROI as a function of ATR has gone up as

compared to earlier. (CMIE Data)This could be due to increased competition and improved

consumption power; Companies need to generate more sales from the same assets due to

competitive pricing.

Pre liberalization era was dominated by license raj and monopolies which is reflected in RBI

data. Margins dominated the sensitivity of ROI in Pre liberalization era. As Sales were more

or less assured only concern were margins.ROI was less sensitive to ATR as there was

limited opportunity to generate higher sales with same assets.

Only exception to this is construction sector. Construction sector also follows the same

principles for ROI if one considers cash profit rather than book profit.


SECTION-III

5-LITERATURE REVIEW

Ms. Smita Jape, Assistant Professor, DR VN BRIMS

This section presents a review of published

research:

29 Research Papers

2 Theses


Table 5.1 Summarized Table of an Overview of Research Papers Studied

Category Area Research

Paper

Countries Year Of

Publications

A Financial

Objectives of

Management

Paper No 1 U.S. 2001

B Leverage Paper No 2-8 U.S.,INDIA,U.K,CANA

DA

FROM 1999-2013

C Capital

Budgeting

Paper No 9-13 U.S., INDIA, ,CANADA,

SOUTH AFRICA,

FROM 2005-2012

D Capital Structure Paper 14-20 US,INDIA,TAIWAN,CH

INA

CANADA

FROM 1975-2011

E Cost of capital Paper 21-13 U.S. UNITED ARAB OF

EMIRATES,U.K

FROM 1978-2012

F Dividend Policy Paper 24-25 U.S., INDIA, ,CANADA,

AFRICA

FROM 1978-2013

G Corporate

decision making

Paper 26-29 US,INDIA,

SOUTHWEST

ASIA,CANADA

FROM 2000-2013

H Thesis on

corporate

finance

TH No 1-2 U.S. FROM 2000-2013

5.1 REVIEW OF PUBLISHED RESEARCH

Literature review of trends in finance included a study of 29 research papers in the area of finance

with focus on financial objectives, leverage, capital budgeting, capital structure, cost of capital

dividend policy and corporate financial decisions .The 29 papers represent an admixture of thoughts


from different continents of the globe, America (Canada and U.S), Europe (UK), Asia (India China,

Taiwan) and Africa. The breakup of research area cum geographic point of origin is as follows.

Sixteen (55) % of papers come from U.S. and Europe as against thirteen (45%)from Asia and

Africa respectively. To start with, the summarized table tries to capture an overview of papers

studied and present a synoptic view of things to follow. This is further followed by a tabular

version of literature review which indicates the name of research paper along with that of the

journal, along with year of publication, the hypothesis , research issues addressed, the quantitative

methods deployed and last but not the least the outcome of the study. Following the tabulation a

brief and laconic description of details of every research paper is presented.

While discussing the trends in finance an attempt has been made to organise the matter in a manner

which helps to decipher the trends, area wise rather than the sequence of papers 1-28. As a result we

are in a position to understand trends in finance in terms of, the broad issues in financial

management viz,

a. sources of finance( Capital structure, leverage, and cost of capital ) ,

b. uses of finance ( Capital budgeting dividend payout. and

c. other areas like corporate financial decisions including what should be financial objectives

and Research needs in corporate finance

d. a cross country comparison of the trends in finance with respect to areas chosen for study

e. a holistic view of the spirit underlying the trends in finance:

An exploration of this 29 research papers has resulted in an understanding of cross cultural

dimensions relating to research in finance as well as the practice of finance in the respective

countries and continents.

Thus the following facts emerge

Deployment of measures of acceptability to appraise the economic worthiness of investment

proposals varies from continent to continent.

In Africa sophisticated measures of acceptability like IRR and NPV are not yet in vogue

unlike the experience in other continents.

Further the 29 research papers takes the reader through an array of tools and techniques used

for research are T test ,F test, Simple,Mutiple regression, averages and measures of

dispersion, coefficient of correlation and variance ,Chi square Test Tobin skewhanson and


Anderson, and phi Test. In addition exploratory studies were used to capture the practices of

financial management in different countries viz In another case Likert scale was also used

as a statistical measure.

Thus the nature, scope art and science of finance are presented in juxtapositions along with unique

inputs which corroborate and complement the outcome of 29 research papers or contradict to

present a contrarian view on a particular area studied.

In South Africa companies tend to adopt advanced risk techniques like ‗Sensitivity‘ analysis

along with the traditional methods like ‗Shorter Payback Period,‘ and ‗High Cut off rates‘ .For

the purpose of incorporating risk in investment decision, Sensitivity analysis and key tools like

Monte Carlo and Decision Tree approach have not yet attracted the fancy of corporate in Africa

.It is further observed that adjusting for inflation and arriving at inflation adjusted cash flow

have found an increasing prevalence but in contrast the otherwise acceptable IRR method,

Modifying IRR has limited role in the economic process.

The papers published In U.S. shows; the use of sophisticated techniques varies with the size

of the firm and with the type of project under consideration. The findings show an increase

in the use of risk analysis techniques and sophisticated management techniques like Linear

programming, Game theory, Simulation, Nonlinear programming, utility theory, Critical

path etc in Continent America which is not prevalent in other continents like Asia and

Africa.

Research papers in U,S, indicated use of real options technique to supplement NPV method

in capital budgeting ,is accepted as a current trend ,whereas papers in China suggests

NPV as still preferred option for capital budgeting decisions.

While comparing the trends in capital structure of different corporate in various continents further

findings supports that the average firms adjustment speeds towards target debt ratio have increased

in all South American countries over the period (1900-2004)of financial liberalization. On the

contrary, firms‘ adjustment speeds did not increase in Southeast Asian countries. Deviations from

target debt ratio are halved within 1.09 years in South America and 1.19 years in Southeast Asia,

suggesting speed of adjustment is relatively faster in South American countries than the -Southeast

Asian countries.


The findings as per sectors are different in the way that financial risk -that is the risk arising out of

degree of financial leverage, it is well understood that proportion of debt fund provided by the long

term debt as well as by short-term debt is significantly related to the level of financial risk of the

firms under Cement, Food, Pharmaceutical, Information technology, Steel and Textile sectors.‖

Panel multiple regression results show that the maturity of the debt capital market has a significant

and positive influence on the firms' capital structure. In contrast, developments in the equity capital

market have an inverse impact on the debt ratios of property companies in real estate sector only.

The overall findings of dividend policy are interesting and suggest as follows;

Analysis of influence of tax regime changes shows that the tradeoff theory does not hold true in the

Indian context, as Indian corporate firms on average do not appear to have increased dividend

payments despite a tilt in tax regime in favor of more dividends. Trends indicate that the number of

firms paying dividend has shown down trend till 2002 and has risen subsequently and decreased

again in 2008. Average DPS on the other hand has shown a declined till 1999, and has shown

growth from 2002 to 2008. Average percentage DPR showed a more fluctuating pattern throughout

the period of study. Analysis also shows that only a few firms have consistently paid same levels of

dividend. Companies paying dividends regularly, have consistently paid higher payout as well as

higher average dividend compared to that of current payers. Initiators have always paid higher

levels of dividend yield compared to that of other payers. Industry trends indicate that firms in the

electricity, mining and diversified industries have paid higher dividends where as textile companies

have paid less dividends. The research finding establishes the validity of the Linter model in the

emerging Indian market. The findings establish the relationship between current dividend as

dependent variable and current earnings and past dividend as independent variables and results

show that Indian firm relies both on past dividend and current earnings in deciding the dividend

payout .The dividend policies are also influenced greatly by implications of market inefficiencies

,behavioral approach than were in earlier periods


5.2 A REVIEW OF RESEARCH PAPERS -A PROFILE

5.2.1 Topic: Financial Objectives of Business: Research Papers (1)

Name of

Research

Paper

Name of

Journal /

Year of

publication

Hypothesis

/ Research

Questions

Quantitative

Models used

Outcome of study

1)"The

Theory

and

Practice

of

Corporate

Finance:

Evidence

From the

Field

Financial

Management

Association

International,

Ronald D.

Vol. 5, 20

US.

How it‘s

difficult for

CFOs to

decide

optimal

composition

of capital

structure

as

imbalance

of this can

affect

shareholders

in the long

run and can

give

benefits in

the short

run.

F TEST

LIKERT

Scale

T est

Multiple

regression

Analysis

A vast

majority of

companies

do use the

capital asset

pricing

model

(CAPM),

which they

didn't do 20

years ago."

The objective to maximize Earnings

Before Interest and Taxes (EBIT) and

Earnings Per Share (EPS) is very

important while making corporate

financial decisions .

The recent trend observed that

companies are relatively more

concerned about the maximization of

the spread between Return on Assets

(ROA) and Weighted Average Cost of

Capital (WACC), i.e. Economic Value

Added (EVA).as well as CVA (spread

between cash flow ROI and

WACC)which was not considered

significant during pre liberalization

period.


5.2.2 Topic: Financial Leverage: Research Papers (2-8)

Name of

Research Paper

Name of

Journal /

Year of

publication

Hypothesis /

Research

Questions

Quantitative Models

used

Outcome of study

2)Ross model of

financial leverage

Journal of

financial and

quantitative

analysis 1978

M.Ross

Tests the

association

between

leverage and

the value of

the firm.

T test, F test,

Multiple regression

There is positive

association between

leverage and the

value of the firm.

3) Determinants of

Financial

Leverage:

Further Evidence

Chartered

Accountant,

29 (6), '451 -

456 (1980)

Bhat

Ramesh K.,

Addresses

the

relationship

between

financial

leverage and

operational

characteristics

Coefficient of

correlation, Variance

There is a positive

correlation

between financial

leverage and

operational

characteristics of a

firm viz size,

business risk, and

profitability.


4Determinants of

Financial Leverage

and

Operating

Leverage,

Chartered

Accountant,

519-527

(1983).

Ventkateshan

Journal of

Chartered

accountant

1983'

Examines

the systematic

relationship

between

insider

(managers)

holding and

debt.

Mean, Regression,

Standard deviation,

Coefficient of

correlation

A high level of debt

increases the risk of

firms stock and

tends to drive out

shareholders,.

Name of

Research Paper

Name of

Journal /

Year of

publication

Hypothesis /

Research

Questions

Quantitative

Models used

Outcome of study

5) Determinants of

Capital Structure

Research

Journal in

Finance, 7, 1-

19 (1988) by

Friend and

Hasbrouck

Andy Chem,

Relationship

between

financial

leverage and

industrial

classification

T test, F test,

Multiple regression

There is Positive

relationship between

leverage and key

characteristics of the

firm viz dividend

payout and operating

leverage.


6)The Impact of

Operating and

Financial Risk

Journal of

.Economics

and Finance

(1996

By Richard

Lord

Studied the

association

between

the degree of

operating

leverage,

and the ratio

of net profit

to firm value

Coefficient of

Correlation

Multiple regression

Financial risk

Found to be positively

correlated with

degree of operating

leverage and the ratio

of net profit to firm

value

7).How do

Investors Judge the

Risk of Financial

Items?

Accounting

Review, 80

(1), 221-242

(2005)

Lisa Koonce,

McAnally

and Mercer

How do

investors

perceive the

financial risk

Coefficient of

correlation and

Multiple regression

Financial leverage

while positively

related to total and

unsystematic risk,

does not appear to be

related to systematic

risk.

8)The Impact of

Financial Risk on

Capital Structure-

Decisions in

Selected Industries:

A Descriptive

Analysis-

Advances in

management

,2011

Raiyani

Jagdish

R.INDIA-

Volume 4

Is there any

impact of

financial risk

on capital

structure

decisions in

Indian

industries?

Mean, Regression,

Standard deviation,

Coefficient of

correlation,

Variance,

F TEST

Proportion of debt

fund provided by long

term debt as well as

short-term debt is

significantly related to

the level of financial

risk of the firms in

Cement, Food,

Pharmaceutical,

Information

Technology, Steel

and Textile sectors.‖


5.2.3 Topic: Capital Investment Decisions-Research papers 9—10

5.2.3.1 Study of practices followed in corporate 11-13

Name of

Research

Paper

Name of

Journal /

Year of

publication

Hypothesis /

Research

Questions

Quantitative

Models used

Outcome of study


9)Capital

budgeting

practices

in South

Africa: A

review

South

.African

.Journal

.Business

.Manageme

nt

. 43(2), C

Correia

University

of Cape

Town,

Republic of

South

Africa

2012

Is capital

budgeting

consistent

with the

maximization

of

Shareholder

wealth in

South

Africa?

Descriptive

F TEST

Likert Scale

Test

Multiple

regression

Analysis

1)There has been growth in the use of

Net Present Value (NPV) method

2) The Internal Rate of Return (IRR)

technique remains the primary method

used in practice despite some serious

draw backs.

3) Larger companies are more likely to

use DCF methods.

4) There has been a significant growth

in the use of sensitivity analysis and

scenario analysis.

5) Increase in spending of capital

expenditures Showed increase in

returns to shareholders surveyed.

During the 1955-1975 period covered

by seven studies. Reported percentage

use of discounted cash flow techniques

rose from 9%" to 66%.

The use of discounting is highest for

expansion type

Projects. An expansion decision

involves a choice: should we or should,

we not move into expansion in this

country or product area? Sensitivity

analysis is the most widely adopted

risk evaluation method.


10)

The Continuing

Increase in

the Use of

Sophisticated

Capital Budgeting

Techniques

Thomas P.

Klammer

Michael C.

Walker

California

Management

Review

Vol. XXVII.

No. 1, Fall

1984

, The Regents

of the

University of

California

― There is an

Increase in use

of sophisticated

capital

budgeting

Techniques in

industry‖

Results of three

separate

questionnaire surveys

dealing with

the capital budgeting

practices of large

firms conducted

in 1970, 1975, and

1980

Past trends indicate a

continued increase in the

use of sophisticated

capital budgeting

techniques by large firms

11)Survey and

analysis of capital

budgeting methods

Journal of

finance

March 2008

"Hanwen

Chen

Xiamen

University

by Schall,

LD; Sundem,

GL;

Geijsbeek, in

Whether the

"smarter‖

Investment

decisions are

resulting in

an increase in

productivity.

F TEST

Likert Scale

T est

Multiple regression

Analysis

Results show positive

increase in

productivity along with

more use of Capital

budgeting techniques

proved

smarter‖

investment decisions,

are resulting in an

increase in

productivity


12)Research Paper:

Capital Budgeting

Practices in

Manufacturing

Sector in India

International

Journal Of

Commerce

and

Management

Monika

Verma

2010

1) There is a positive

association between

capital budget and use

of NPV whereas

capital budget is

negatively correlated

with use of payback

method

2)There is no

significant relation

between capital Budget

and IRR (Internal

Rate of

Return),ARR,(Annual

Rate of Return

PI,(Profitability Index)

and sensitivity analysis


3)A Survey of

Capital Budgeting

Practices in

Corporate India

The Journal

of Business

Perspective l

Vol. 13 l No.

3 l July–

September

2009

Satish

Verma,

Sanjeev

Gupta and

Roopali Batra

1)Examining

the corporate

practices

regarding the

methods of

capital

budgeting

used for

evaluating

an

investment

proposal.

(ii)

Analyzing

the corporate

practices

regarding

risk

techniques of

capital

budgeting

used for

Adjusting

risk in

investment

proposals.

Comprehensive

primary survey

conducted in

companies in India

1)Respondent

companies mentioned

cost of debt as the best

discount rate followed

by the weighted

average cost of capital

preferred by 45%

companies followed by

rate of return and cost

of retained earnings

2) Sensitivity

analysis is the most

widely adopted risk

evaluation method.

3) Survey findings

indicate that decisions

regarding leasing is

increasingly being

included as part of the

capital budgeting

process with the

percentage rising from

55% in 1965 to 80% in

1980.


5.2.4 Capital Structure - Research Papers — 14-20

5.2.4.1 Study of practices followed in Corporates--21-22

Name of

Research

Paper

Name of

Journal /

Year of

publication

Hypothesis /

Research

Questions

Quantitative

Models used

Outcome of study


14)Debt

Capacity

and Tests

of Capital

Structure

Theories

Journal of

Financial and

Quantitative

Analysis Vol.

45,

No. 5,2010,

pp.

1161–1187

Michael L.

Lemmon and

Jaime F.

Zender*

Studies

designed

to detect the

research question

―whether the

tradeoff theory

or the pecking

order theory best

describes the

financing choices

of corporations‖

Multiple

regression

coefficient of

correlation,

variance

1) The issuers

of significant

amounts of equity

are, on an average,

growing very

fast (average growth

in assets is49.8%

annually as compared

to 10.6% for

nonissuers) and

losing money average return

on assets

(ROA) is –0.024

compared to 0.107

for nonissuers).

2)Equity issuers

have relatively

low leverage prior

to the issue. *Group

of firms most likely

to be constrained

by debt capacity. Firms

facing debt capacity

constraints (generally small,

high-growth firms) see

significantly

less negative market

reactions to announcements

of


Equity issues when compared

to unconstrained (generally

large, mature) firms. Overall,

the evidence suggests that the

frequent equity issues by

young, high-growth firms are

consistent with the existence of

debt capacity constraints and

do not contradict a version of

the pecking order that

recognizes limits to the use of

debt financing.

15)Financial

liberalization and

firms‘ capital

structure

adjustments

evidence from

Southeast Asia and

South America

Journal of

economics

and finance ,

Rashid

Ameer 2010

# Springer

H1:

Adjustment

costs are

important in

explaining

firms

adjustment

towards their

target debt

ratio

Mean,

Median,

Standard

Deviation,

Partial

Adjustment

model

The estimated adjustment

coefficients imply that on

average firms‘ adjustment

speeds towards target debt

ratio have increased in all

South American countries over

the period (1990-2004)of

financial liberalization. On the

contrary, firms‘ adjustment

speeds did not increase in

Southeast Asian countries.


Name of

Research Paper

Name of

Journal /

Year of

publication

Hypothesis /

Research

Questions

Quantitative

Models used

Outcome of study

Deviations

from target debt ratio

are halved within

1.09 years in South

America and 1.19

years in Southeast

Asia, suggesting

speed of adjustment

is relatively faster

in South American

countries than

Southeast Asian

Countries.


16) Multi objective

Capital Structure

Modeling: An

Empirical

Investigation of

Goal Programming

Model Using

Accounting

Proxies

Journal of

Accounting,

Auditing and

Finance2012

by Yamini

Agarwal1, K.

Chandrashekar

Iyer1, and

Surendra S.

Yadav

The study has

explored the

relationship

of leverage

ratio with

market

capitalization

and earnings

per share

(EPS).

Correlations

between

market

capitalization,

and EPS

Coefficient

of

correlation,

Sensitivity

Multiple

regression,

Jarque Bera

Test

A

quantitative

approach

using goal

programming

model is

deployed to

capture

multiple goal

before

enterprise.

1)Leverage ratios were

found to be highly

negatively correlated with

market capitalization, in

all industries except high

asset base industries like

capital goods, chemical and

petrochemical,

health care, metal and metal

products, oil and gas,

tourism, transport

equipment, transport

Services.


Name of

Research Paper

Name of

Journal /

Year of

publication

Hypothesis /

Research

Questions

Quantitative

Models used

Outcome of study


17) Where Did All

the Dollars Go?

The Effect of Cash

Flows on Capital

and Asset Structure

Journal of

Financial and

Quantitative

Analysis Vol.

46,

Sudipto

Dasgupta,

Thomas H.

Noe, and

Zhen Wang.

2011

The paper

studies the

sensitivity of

levels of cash

flow of the

firm with

respect to

investment

decisions

Coefficient of

correlation

regression

Tobins Q

1)A sensitivity of

investment levels to

cash flows indicates

that the cost of internal

finance is lower than

that of external finance

2)The variation in the

cost is attributed to

―agency cost ,agency

conflicts, or adverse

selection.

3) The firms follow

pecking order in use of

funds, First delivering,

saving cash, second

raising external

financing and then

lastly investing. In the

short term, the

noninvestment uses of

cash dominate. Firms

mainly reduce external

financing and add to

their cash balances.

However,

subsequently, firms

step up investment.

The so-called

unconstrained firms

step up investment

more by raising

additional external

funds and drawing

down their cash


Name of

Research Paper

Name of

Journal /

Year of

publication

Hypothesis /

Research

Questions

Quantitative

Models used

Outcome of study

Constrained

firms also step up

Investment, but not as

much. These firms do

increase short-term

debt financing in

subsequent years, but

they do not increase

long -term debt. They

actually reduce equity

financing.


18)Manager

Characteristics and

Capital Structure:

Theory and

Evidence

Journal of

financial and

quantitative

analysis vol.

46, 2011,

university of

Washington,

Sanjai

Bhagat, Brian

Bolton, and

Ajay

Subramanian

in

The paper

tests the

hypothesis

―Manager

characteristic

has an impact

on capital

structure in a

structural

model ―

Coefficient of

correlation

regression

P Hansen sargon

test ,Anderson

rubin est

1)It implements the

manager‘s optimal

contracts through

financial securities that

lead to a dynamic

capital structure, which

reflects the effects of

taxes, bankruptcy

costs, and manager-

shareholder agency

conflicts

2)Long-term debt

declines with the

manager‘s ability,

inside equity stake, and

the firm‘s long-term

risk, but increases with

its short-term risk.

Name of

Research Paper

Name of

Journal /

Year of

publication

Hypothesis /

Research

Questions

Quantitative

Models used

Outcome of study


19)Debt and taxes

Nobel Prize-

winning

Franco

Modigliani

and Merton

Miller papers

in the 1950s

How to make

effective

capital

structure

decisions?

Coefficient of

correlation

regression

Asserts that companies

choose their capital

structure on the basis

of a trade-off between

the benefits of debt

(the tax deductibility of

interest payments) and

the drawbacks of debt

(higher interest

payments).

19b) Debt and

taxes

Miller, M.H.,

1977. Debt

and taxes.

Journal of

Finance 32,

261-275.

Has the trend

of capital

structure

corporate

decision

making has

been changed

over the

period of 20

years(1950-

1977)

Coefficient of

correlation

Phi test

Chi square test

―Maintaining financial

flexibility‖ — as the

most important factor

i.e, keeping debt levels

low in order to be

ready for unforeseen

opportunities but the

use of other practices

remain unchanged.

Name of

Research Paper

Name of

Journal /

Year of

publication

Hypothesis /

Research

Questions

Quantitative

Models used

Outcome of study


20) How and When

Do Firms Adjust

Their Capital

Structures toward

Targets and if there

are adverse

selection costs

associated with

asymmetric

information

Journal of

Finance • vol.

Lxiii, no. 6 ,

2008

by Soku

Byoun-

Hypothesis

1) Small

firms and

firms without

bond ratings

adjust faster

when their

debt ratio is

above target

i) dividend-

paying firms

exhibit

a greater

tendency to

adjust their

capital

structure

toward the

target with a

financial

deficit/surplus

iii) firms with

better stock

performance

are slower to

adjust

iv) firms

with higher

operating

profits use

more debt

when they

have financial

deficits

F TEST

Test

Multiple regression

Analysis

Altman‘s z score

1)Most adjustments

occur when firms have

above-target (below-

target) debt with a

financial surplus

(deficit).

2) Firms move toward

the target capital

structure when they

face a financial

deficit/surplus—but

not in the manner

hypothesized by the

traditional pecking

order theory

The target debt level is

estimated by the

predicted

value from a cross-

sectional Multiple

regression each year,

where the total/long-

term debt divided by

book/market value of

assets is regressed on

the following

variables: industry

median debt ratio;

marginal tax rate;

operating income

divided by assets;

market-to-book ratio

of assets; log of book

value of assets;


Name of

Research Paper

Name of

Journal /

Year of

publication

Hypothesis /

Research

Questions

Quantitative

Models used

Outcome of study

v) firms with

high MB use

less debt

when facing

financial

deficits

(because debt

is less

attractive to

high

growth firms

and/or equity

financing is

less

restrictive)

than do firms

with low

MB.

depreciation and

amortization divided

by assets; fixed assets

divided by assets;

research and

development (RandD)

expenditures divided

by assets; a dummy

variable for missing

RandD; cash dividends

divided by assets; and

Altman‘s Z-score.

TDE (total debt equity

represents the

deviation of

the total (long-term)

debt-to-asset book

(market) ratio from its

target.


5.2.5 Cost of Equity -- Research Papers 21-23

Name of

Research Paper

Name of

Journal /

Year of

publication

Hypothesis /

Research

Questions

Quantitative

Models used

Outcome of study


21)Equity

mispricing

adjustment costs

Journal of

Financial and

Quantitative

analysis Vol. 47,

2012,.University

of Washington,

By Richard S.

Warr, William

B. Elliott,

Johanna

Ko¨eter-Kant,

Does Equity

mispricing

creates an

impact on

the speed at

which firms

adjust to

their target

leverage

(TL) and is it

done in a

predictable

way

depending on

whether the

firm is over

or under

levered.

H1-When the

firm is

overvalued

in the market

the firm

adjusts more

rapidly

towards its

TL-

Mean, Median,

Multiple

regression

,Standard

deviation,

Coefficient of

correlation

Variance,

F TEST

Coefficient

If equity is

overvalued in the

market, the firm‘s

cost of issuing equity

is reduced, whereas

undervalued equity

results in a higher

cost of equity. As the

cost of issuing equity

is altered in this

fashion and the firm

exploits or faces these

costs, so the rate at

which the firm adjusts

toward a target debt

ratio depends on the

degree of equity

mispricing.


Name of

Research Paper

Name of

Journal /

Year of

publication

Hypothesis /

Research

Questions

Quantitative

Models used

Outcome of study

22)Effects of Audit

Quality on

Earnings

Management

and Cost

of Equity

Capital: Evidence

from China*

Canadian

Academic

Accounting

Hanwen chen

Jeff eyun

chen,

Gerald j.

lobo,

University

of Houston

vol 28

2010

― The quality

of audit

creates an

effects on

earnings

management

―Is cost of

equity

capital more

pronounced

for SOEs.

(State owned

enterprises)

than

for NSOEs (

Not State

owned

enterprises

Regression

T test

State Owned

Enterprises and Not

State owned

enterprises

differ

in the nature

of their ownership,

agency relations,

and bankruptcy

risks, which

lead to differences

in the effectiveness

of auditing

in reducing

Financial reporting

and investors‘ pricing

of information

risk.


23) Disagreement

and the Cost of

Capital

Journal of

Accounting

Research

Vol. 49

Robert

Bobert

Bloomfield

and

Paule,Fischer

March 2011

The paper

assess how

forms of

disagreement

among

investors

affect a

firm‘s cost of

capital.

Coefficient of

correlation

regression

Phi test

Chi square test

―Cost of capital is

driven not only by

investors‘ uncertainty

about the firm‘s future,

earnings performance,

but also by investors‘

uncertainty about the

evolution of beliefs,

which partly

determines the path of

price Theory of perfect

market.

5.2.6 Dividend policy- Research Papers - 24-25

Name of

Research Paper

Name of

Journal /

Year of

publication

Hypothesis /

Research

Questions

Quantitative

Models used

Outcome of study


24) The interaction

of corporate

dividend policy and

capital structure

decisions under

differential tax

regimes

Journal of

Economic

Finance

2012

James Owers

The

interaction of

corporate

dividend

policy and

capital

structure

decisions

under

differential

tax regimes

is studied in

the paper .

Exploratory

1) When the dividend

tax rate exceeds the

capital gains tax rate,

dividend payout can

partially offset value-

enhancing effects of

leverage.

2) When the two rates

are close, dividend

payout loses its

moderating influence.


25) Dividend

policy of Indian

corporate firms: an

analysis

,

Asia Pacific

journal of

research

in business

management

DR. Sanjay

J. Bhayani*

2010

The present

study

examines the

dividend

behavior of

Indian

corporate

firms over

the period

1997 – 2008

and attempts

to explain the

observed

behaviour

with the help

of trade-off

theory

Regression

pooled OLS

regressions

Results support the

Linter model.

1)Dividend stability of

firms in India show

that Indian firm relies

both on past dividend

and current earnings in

deciding the current

period‘s payment of

dividends.

2) Dividend trends in

India indicate that the

number of firms

paying dividend during

the study period has

shown down trend till

2002 and has risen

subsequently and

decreased again in

2008.

Name of

Research Paper

Name of

Journal /

Year of

publication

Hypothesis /

Research

Questions

Quantitative

Models used

Outcome of study


3)Average DPS on the

other hand has shown a

declined till 1999, and

has shown

growth from 2002 to

2008. Average

percentage DPR

showed a more

fluctuating

pattern throughout the

period of study. The

results of Linter‘s

model to test for

dividend stability of

firms in India show

that Indian firms rely

both on past dividend

and current earnings in

deciding the current

period‘s payment of

dividends.


5.2.7 Corporate Decision making Research Papers 26-29

Name of

Research Paper

Name of

Journal /

Year of

publication

Hypothesis /

Research

Questions

Quantitative

Models used

Outcome of study

26)Research Needs

in Corporate

Finance:

Perspectives

GabrielG .

Ramirez,D

avidA .

Waldman,

and DennisJ .

New York

Financial

Management

vol 20--1989

Addresses

perceptions

of important,

less-

addressed

problems in

corporate

finance in

order to

direct future

financial

research

Addressed

needs of

research in 4

areas

Operational

financing

long-term

financing

regulatory

Control and

ownership

Areas.

Coefficient of

correlation

Regression

Phi test

Chi square test

Concluded that

regulatory and long

term financing

problems are more

important and needs

more attention.


27)corporate

financial decisions

an empirical study,

Investment and

Financing in the

Corporate Sector in

India

Tata

McGraw-Hall

Publishing

Co. Ltd. New

Delhi; pp160

Krishna

Murthy and

D. U. Sastry.

Tries to

understand

interesting

inter-

relationships

between the

triad

decisions of

investment,

financing and

dividends

Exploratory

research

data of financial

statements

1) Dividends get a first

claim and hence

retained earnings for

re-investment is

residual in character.

2) Dividend decisions

are autonomous of

investment decisions

and the availability of

external financing.

Name of

Research Paper

Name of

Journal /

Year of

publication

Hypothesis /

Research

Questions

Quantitative

Models used

Outcome of study

28)Adding

flexibility for NPV

method in capital

budgeting.

Global

conference

on business

and finance

proceeding

June 2012vol

7 by Chen

Jeng Hong

―Addressed

the research

question of

use of NPV

method to

supplement

the other

Exploratory

research

Data of financial

statements

1)NPV is the most

popular method

2) Large companies

tend to adopt

sensitivity analysis

method for

incorporating risk in

capital budgeting.

3)Use of real options

to supplement the NPV

will be future trend


29)Recent

Developments in

Corporate Finance

Major evolutionary

trend

Edward Elgar

Jay R. Ritter,

editor

October 19,

2003

Journal of

Financial

Economics, a

Brennan

prize

Prize winning

paper

The paper

studies

various

trends in

corporate

finance

related to the

impact of

taxation on

corporate

decision

making,

especially in

the areas of

capital

structure ,

payout

policy

F Test

Likertscale

T test

Multiple regression

Analysis

The recent trend and

shift of corporate

finance decision

making towards four

important aspects

1)Impact of taxation

on corporate decision

making, especially in

the areas of capital

structure

2) Corporate

governance issues.

3) Willingness to adopt

behavioral approaches,

including a willingness

to assume that

informational

inefficiencies are an

important determinant

of managerial choices.

4) Implications of

market inefficiencies

Name of

Research Paper

Name of

Journal /

Year of

publication

Hypothesis /

Research

Questions

Quantitative

Models used

Outcome of study


Thesis 1)Corporate

Finance in the

1990s Implications

of a Changing

Competitive and

Financial Context*

Thesis

By D.

Lessard

Massachusetts

Institute of

Technology

Addresses

following

questions

:1)changes

in financial

functions in

context of

changing

competitive

and financial

environment

2) when

creditors,

with the

higher

leverage

levels of

LBOs,(

leverage

buyouts)

have a clear

interest in

having firms

hedge their

cash flow

exposures.

Why more

covenant do

not include

hedging

requirements

also is a

puzzle ?

Mean,

Regression

Standard deviation,

Coefficient of

correlation

Variance,

F TEST

1)Financial function

must simultaneously

be differentiated and

yet integrated into a

variety of other

specialist domains,

which in turn calls for

an expert manager -

neither

an isolated technical

specialist or a "thin

veneer" generalist, but

one who can operate

in both domains.'

2)These changes have

created two often

opposing pulls on

financial management

.On the one hand, they

call for a deepening of

financial technology

and, hence, an increase

in the specialist nature

of financial

management.

Requirements for such

deepening include

extending risk

management from one

dimensional matching

to multi-dimensional

dynamic approaches


Name of

Research Paper

Name of

Journal /

Year of

publication

Hypothesis /

Research

Questions

Quantitative

Models used

Outcome of study

2)Thesis

The theory of

corporate

finance—A

historical overview

Phd Thesis

Michael

Jenson

Harward

Business

school

A review of

the trends

and

development

of the

modern

theory of

corporate

finance.

Coefficient of

correlation

Regression

Phi test

Chi square test

The efficient market

hypothesis holds that a

market is efficient if it

is impossible

to make economic

profits by trading on

available information.

The thesis covers all

the study of all theories

evolved over a period

of 5oyears including

portfolio, efficient

market,


5.2.8 DETAILED REVIEW OF RESEARCH PAPERS (23) AND THESIS (2)

GROUP TOPIC RESEARCH PAPERS

A Financial objectives Research Paper 1

B Leverage Research Papers 2,4,6,8,13

C Capital investment decisions Research Paper 9,12,13,14

Other paper (1)

D Capital structure ResearchPapers16,18,20,21,27

Other paper(1)

E Cost of capital Three other papers studied(3)

F

Dividend Policy Research Papers No 24,25

G Corporate Financial Decisions Research Paper 29,

Thesis 1 and 2


The trends observed through key findings of the literature review are

as follows:

The objective to maximize Earnings Before Interest and Taxes

(EBIT) and Earnings Per Share (EPS) are very important while

making corporate financial decisions in business.

Companies are relatively more concerned about the

maximization of the spread between Return on Assets (ROA)

and Weighted Average Cost of Capital (WACC), Economic

Value Added (EVA) as well as Market Value Added (MVA)

which was not considered significant during pre liberalization

period.

The high growth firms, using sales as the basis, are

significantly more likely to use maximizing EVA as their

objective of financial management than low growth firms.

The firms with high growth in assets are giving significantly

more importance to the maximization of MVA as a corporate

objective than firms with low growth in assets

*Source: Economics and politics of corporate finance

&corporate control Cambridge university press200 pg 109

In India corporate objective

is largely biased towards

shareholders wealth

maximization philosophy.

The Kumar Mangalam Birla

Committee on corporate

governance in India in its

report observed that ― The

fundamental objective of

corporate governance is the

maximization or

enhancement of long term

shareholders value while

protecting the interest of

other stakeholders‖

Research Paper1: The

Theory and Practice of

Corporate Finance:

Evidence From the Field:

Financial Management

Association International,

Ronald D

Vol 5, 2002

*A contrarian view by German banker Carl

Firsternberg, offers an extreme version on

how shareholders were regarded by German

managers

*―Shareholders are impertinent because they

give their money to somebody else without

effective control over, what the person is

doing with it, and impertinent because they

ask dividend as a reward for their

stupidity .‖

A) Financial Objectives of Business:

I

I

I


'Theory of maximizing shareholder value has done great harm

to businesses'

―I would argue that companies should go beyond their worship of shareholders

who often don‘t care about the company and jump in and out of owning its

stock. The theory of maximizing ―shareholder value‖ has done great harm to

businesses.

I have argued that smart companies must focus on the other stakeholders first –

customers, employees, suppliers and distributor.

Those companies that operate on the triple bottom-line — people, planning

and profits – will outperform those who only pursue profit”.

(Monday, August 27, 2012 - DNA Vivek Kaul

A) Financial Objectives of Business:

I

I

I

―We find among the excellent companies a few common attributes that unify

them despite their different values. First .....these values are almost always stated

in qualitative rather than quantitative terms. When financial objectives are

mentioned, they are almost always stated in ambitious but never precise Further

more financial and strategic objectives are never stated alone. They are always

discussed in the context of other things the company expects to do well .The

idea is that profit is a natural byproduct of doing something well, not an end

in itself.”

Source: Fundamentals of Financial Management by Brigham &Houston

http://www.dnaindia.com/authors/vivek-kaul


Profit maximization

doesn‟t make sense as a

corporate objective due

to three reasons

1) Maximizing profits?

Which years profits?

Shareholders might not

want the manager to

increase next years profit

at the expense of profits in

last years profits in later

years

2)A company may be able

to increase future profits

by cutting its dividend and

investing the cash. That is

not in the shareholders

interest if a company earns

only a few return on

investment.

3) Different accounts may

calculate profits in

different ways. So you

find the decision that

improves in one accounts

eyes will reduce them in

another‘s.

Fundamentals of Financial

management by Brigham

and Houstan pg No 24

Well managed companies have corporate eyes on

performance indicators other than ROI,RI,

Detailed costing variances, bottom line profits,

cash flow, earning per share. Peters and

Waterman argue that if companies performance

in buying raw materials making and selling their

products and looking after their workforce is

planned, monitored and controlled in a manner

which displays both aggression and sensitivity,

bottom line profits will look after themselves.

With an even more telling observation Peters and

Waterman condemned the obsession that some

companies have detail financial objectives.

In under performing companies they were

familiar with the only objectives that

management got animated about where the

ones that could be quantified- the financial

objectives such as earning per share and

growth measures. Ironically the companies that

seemed the most focused- those with the most

quantified statements of mission, with the most

precise financial target- had done less well

financially than those worth broader less precise,

more qualitative statements of corporate purpose

Financial management by Mayors Brearly (page

281)

• Economic Value Added (or EVA), a registered

trademark of the consulting firm, Stern Stewart & Co.,

is another close cousin of the NPV method.

• The EVA method begins the same way that NPV

does—by calculating a project‘s net cash flows.

• However, the EVA approach subtracts from those cash

flows a charge that is designed to capture the return

that the firm‘s investors demand on the project.

• EVA determines whether a project earns a pure

economic profit–a profit above and beyond the

normal competitive rate of return in a line of business.

*EVA=Spread across ROI ( Return on Investment) and


Half of India's top firms have destroyed shareholder wealth since FY08For a majority of the value

destroyers; borrowings now exceed their market value, putting them in a debt trap

If retail investors are still shying away from equity markets, there is a solid reason. Nearly half of India‟s top

companies have destroyed shareholder value since the 2008 Lehman crisis. Their market capitalization has

failed to keep pace with expansion in their balance sheets. As many as 77 of the 155 BSE-200 companies

(excluding banking and financial ones) have either reported a decline in their market value since March

2008 or the rise in market capitalization has lagged the increase in capital employed in the business.

The proportion of value destroyers shoots up to 65 per cent if information technology (IT), FMCG and

pharmaceutical companies are excluded from the list. For a majority of the value destroyers (40 out of 77),

borrowings now exceed their market value, putting them in a debt trap.

“A company‟s return on capital employed (ROCE) is the sum of return on equity and return on borrowed

capital, minus interest cost. So when ROCE starts falling, managements try to juice it up by increasing

borrowings. But, if an economic downturn gets prolonged, like it happened after the global financial crisis of

2008, many companies find themselves in a vicious cycle of falling returns and market value and rising

indebtedness,” explains Nitin Jain, head, capital markets, Edelweiss Capital.

Topping the list of companies whose market value has lagged balance-sheet expansion since March 2008 is

Reliance Industries (RIL).

On the positive side, TCS is the biggest value creator, followed by ITC, Infosys, Sun Pharma (Rs 85,000

crore) and Hindustan Unilever.

In the past five years, RIL‟s balance sheet (sum of shareholders‟ equity and borrowings) has increased at a

compound annual growth rate (CAGR) of 15.7 per cent to Rs 2.90 lakh crore at the end of March 2013, from

around Rs 1.40 lakh crore in 2006-07. During this period, its market capitalization declined over Rs 51,000

crore. In other words, RIL‟s market value should have been at least Rs 2.02 lakh crore higher to justify the

growth in its equity and debt during the period. The story is the same for Bharti Airtel, the balance sheet of

which quadrupled during the period as it bought more 3G and 4G spectrum in auctions and acquired Zain

Africa in 2010 for over $10 billion. The company‟s market capitalization, however, declined nearly Rs

22,000 crore during the period, destroying shareholder value in the process. Government-owned Coal India

is an example of a company that destroyed wealth despite being a debt-free entity. The biggest problem are

companies in capital-intensive sectors like telecom, power, construction & infrastructure, metals, mining

and oil & gas. These companies continue to accumulate liabilities, despite a visible decline in return ratios

beginning 2007-08.

Reliance Industries‟ ROCE declined to 10.2 per cent in 2012-13 from 17.2 per cent in 2007-08, while Bharti

Airtel‟s RoCE fell to 7.5 per cent in 2012-13 from 24.5 per cent in 2007-08, as profitability failed to keep

pace with rising balance sheet. RoCE . “Value destruction is common in capital-intensive sectors during an

economic downturn.

Business India Krishna Kant February 19, 2014


There is a positive relationship between leverage and key

characteristics of the firm viz size, business risk,

profitability and dividend payout.

The role of leverage in market capitalization and EPS is

studied and negative correlation is observed between

leverage and market capitalization .However EPS is

positively correlated with leverage

With regard to financial risk that is the risk arising out of

degree of financial leverage, it is observed that proportion

of debt fund provided by the long term debt as well as by

short-term debt is related to the level of financial risk .

Financial risk variables, particularly risk followed by

volatility in ROE, have significant effect on determining the

additional variation in use of debt financing in business

through long-term sources among firms.

* There is positive correlation between financial leverage and

unsystematic risk, however it does not show any correlation to

systematic risk

.

Research Paper:4

Determinants of Capital

Structure Research

Journal in Finance, 7, 1-

19 (1988) by Friend

and Hasbrouck Andy

Chem

Research

Paper2:Determinants of

Financial Leverage:

Chartered Accountant, 29

(6), 451 -456 (1980)Bhat

Ramesh K.

B) Area :Leverage

* Portfolio or market risk – the variability in

shareholders returns. Investors can significantly reduce

their variability in earnings by holding carefully selected

investment portfolios. This is sometimes called „relevant‟

risk, because only this element of risk should be

considered by a well-diversified shareholder

Financial leverage is increased by issuing more debt,

thereby incurring more fixed-interest charges and

increasing the variability in net earnings. this is the risk,

over and above business risk, which results from the use

of debt capital.

Research Paper 8:

The Impact of Financial

Risk on Capital

Structure-Decisions in

Selected Indian

Industries: A Descriptive

Analysis- Raiyani

Jagdish R.India -

Volume 4 Advances in

management ,2011


Pecking order theory describes that managers select capital with the

following preferences like internal finance, debt, and equity

(Myers and Majluf, 1986) The paper assumes that managers do not

seek any optimal level of leverage while making corporate financial

decisions.

Mahindra &Mahindra (M&M)

M &M is a federation of companies with a decentralised approach to treasury

management. There are some companies that Group Finance is mandated to support

from a treasury perspective. However, typically each subsidiary company has its

own CFO who is responsible for day-to-day management of cash and risk.

One Mahindra-Win Win Proposition

. Corporate treasury acts as the facilitator of these arrangements, identifying

and executing on opportunities for intercompany borrowing and lending. Cash

remains within the group, there is a balance sheet advantage, risk is eliminated,

and there are no guarantees or covenants required for external lenders.

Source : V.S. Parthasarathy, Group CIO, EVP – Group M&A, Finance and

Accounts, Member of the Group Executive Board, Mahindra & Mahindra

:-―Financial risk is an Umbrella term for multiple types of

risk associated with financing, including financial transactions

that include company loans in risk of default. Risk is a term

often used to imply downside risk meaning the uncertainty of a

return and the potential for financial loss

http://www.treasury-management.com/category/1/cash-%26-liquidity-management.html#_blank

http://www.treasury-management.com/category/4/risk-management.html#_blank


“Investment thus defined includes, the increment of capital

equipment, whether it consists of fixed capital, working capital

or liquid capital and significant differences of definitions (apart

from the difference between the investment and net investment

)are due to exclusion from investment of one or more of these

categories.”

John Maynard Keynes( The general theory of employment )

The results of the surveys and findings of the research papers clearly

show that firms are increasingly using "sophisticated" capital

budgeting project appraisal techniques taught in business schools.

However these techniques are not uniformly applied and they are not

always the sole basis for decision making.

Increasing number of companies use discounted cash flow

methods like NPV and IRR for measuring the economic

worthiness of Investment proposals. Assessment of risk is

finding an important place in economic evaluation process.

Sensitivity analysis and methods like Monte Carlo and

Decision Tree approach has not yet attracted the fancy of the

corporate world..

Adjusting for inflation and arriving at inflation adjusted cash

flow have found an increasing prevalence.

Modifying IRR has limited role in the economic process

The use of sophisticated techniques obviously varies with the

firm and with the type of project under consideration. The

findings also show an increase in the use of risk analysis

techniques and management techniques (Linear

programming, Game theory, Simulation, Nonlinear

programming, utility theory, critical path etc .

Research Paper : 10

The continuing increase

in use of Sophisticated

Capital Budgeting

Techniques California

Management Review

Vol. XXVII. No. 1, Fall

1984

Research Papers : 9

Capital budgeting

practices in South

Africa: A review C.

Correia, University of

Cape Town, Republic of

South Africa

S.Afr.Journal .Business

.Management.2012,

43(2)

C) Area :Capital Investment

Decisions


― There are also situations where the yield method may lead to different

decisions from those obtained by using the present value procedure. Thus the

measure of investment worth may give different rankings to the same set

of mutually exclusive Choices will be seriously deficient. In this light the

fact that the two discounted cash flow measures of investment worth may give

different rankings to the same set of exclusive investment proposals becomes

of considerable importance‖

(Source:Bierman and Smidt,The Capital Budgeting Decison,p.39

Thus it is interesting to note the observation of Bierman and Smidt

―The yield method gives less correct recommendations for mutually exclusive

investments than those that result from the application of the present value

method because it reflects the average rather than the incremental cash flows.

―

Source:Bierman and Smidt, The Capital Budgeting Decision,pg 41.)

Capital budgeting is very obviously a vital activity in business. Vast

sums of money can be easily wasted if the investment turns out to be

wrong or uneconomic. It builds on the concept of the future value of

money which may be spent now.

It does this by examining the techniques of net present value, internal

rate of return and annuities. The timing of cash flows are important in

new investment decisions.. One problem which plagues developing

countries is "inflation rates" which, in many cases even is double digit

However there may be cases where inflation can become a serious

proposition as it reaches to three digit inflation for .eg Countries like

Argentina, Zimbabwe and Germany where the inflation had reached to

three digit.

Source: Financial Management by Prasanna Chandra


There is a Positive association between capital budget of

firm and use of NPV where as it is negatively correlated

with payback Method. However there is no correlation

between capital Budget and use of IRR, ARR, PI, and

sensitivity analysis

Payback and IRR are complementary to each other

There is a change in trend towards increased adoption of

sophisticated discounted capital budgeting practices like

NPV, IRR as compared to the non-discounted capital

budgeting techniques. However, among the traditional

techniques, Payback Period Method is still preferred in

majority of companies as a supplement to the DCF

techniques.

Majority of the companies in India, use the Weighted

Average Cost of Capital (WACC) for calculating the

Cost of Capital, which is used as a discount or cut off rate

or Minimum Acceptable Rate of Return

The study conducted by Pandey (1989) examined the capital

budgeting policies and practices of firms in India and

Research Paper : 13

Capital Budgeting

Practices in Corporate

India The Journal of

Business Perspective l

Vol. 13 l No. 3 l July–

September 2009Satish

Verma, Sanjeev Gupta

and Roopali Batra -3

For respect to future periods, we are focused to

deal with highly uncertain and merely conjectural

data.

Under these circumstances it is not only easily

understandable but even from the economic stand

point commendable the most people do not

attempt to repeat, for case after case and for year

after year ,the tedious and at the same time

deceptive calculation of the claims of present and

future. Source :Eugene Von Bohm-Bawark

Research Paper: 12

Capital Budgeting

Practices in

Manufacturing

Sector in India A

review ,International

Journal Of

Commerce and

Management

Monika Verma

2010

Research Paper 14:

Debt Capacity and Tests

of Capital structures

Theories by Michael

L.Lemmon and Jaime

Zender in Journal of

Financial and

Quantitative analysis

vol45,2010 University

of Washington 3


compared them with those of U.S.A. and U.K. The study

reveals that payback period method is most widely used

followed by IRR as a capital budgeting technique. The

project risk is assessed through sensitivity analysis and

conservative forecasts.

Further it is observed from literature study of papers and

industry practices followed that the degree to which capital

budgeting tools used, is higher for large firms than for

small firms.. It is further noticed that firms incorporate risk

either by ‗Adjusting the discount rate‘ ‗shortening the

payback period‘ or with the help of methods like ‗Capital

Asset Pricing Model‘. that develops beta ―which identifies

the extent of risk of individual source of finance algorithm

quantified measures.

The trend shows that small corporations use Payback Period

or Accounting Rate of Return as their primary method of

project choice.

Large companies mostly use discounted cash flow methods

like IRR and not NPV The findings do not support the fact

that ―DCF dominant companies outperform non-

DCF dominant companies.‖( C. Correia ,2012 )

Discounted Cash Flow technique is used more often for

Capital Expenditure Decisions than decisions related to Lease

vs. Buy ,Acquisition Analysis ,Stock Selection Tool

,Minimization of Cost Function Inventory Management

,Cash Management ,Security and Portfolio Analysis

,Working Capital Management, and Financial Leverage

Decisions

The outcome of this paper supports the previous

findings that that net present value (NPV) method is very

Research Paper :

Adding flexibility for

NPV method in capital

budgeting. By Chen Jeng-

Hong1 Source: published

in Global conference on

business and finance

proceedings; Jun2012,

Vol. 7 --2

The use of capital budgeting

decisions observed from 1975 till

2013 shows following trend (Based

on industry practises )

Research Paper :26

Research Needs in

Corporate Finance

Perspectives from

financial managersby

Gabriel G.Ramirez

David A Walman and

Dennis J.New York

Management

Association

International

Adding flexibility for

NPV method in

capital budgeting

global conference on

business and finance

proceeding June

2012vol 7 by Chen

Jeng Hong


popular and widely used by firms in capital budgeting in practice. The main

disadvantage of approach is that, it lacks flexibility and the firm needs to make the decision

today, in spite of uncertain factors that the project may face in the future. Hence use of real

options technique to supplement NPV method in capital budgeting will be the future trend.

For the purpose of incorporating risk in investment decision, companies tend to adopt

advanced risk techniques like ‗Sensitivity‘ analysis along with the traditional methods like

‗Shorter Payback Period,‘ ‗High Cut off rates‘ etc.

―Planning and control of capital expenditures is

the basic executive function ,Since

management is originally hired to take control

of stockholders fund and to maximize their

earning power therefore the there is problem of

administering management s trust ship over

capital ―

Managerial Economics Chapter 10Capital

Budgeting by Joel Dean Pg No569

Capital Budgeting ch 10 pg no551

C) Area: Capital Investment

Decisions

Source Financial Management by Dr.Guruprasad Murthy


Leverage ratios were found to be negatively correlated

with market capitalization, in all industries except high

asset base industries like capital goods, chemical and

petrochemical, health care, metal and metal products, oil and

gas, tourism, transport equipment, transport services.

The most apparent effect of adverse selection costs is a firm‘s

preference for internal funds. Accordingly, in the presence of

adverse selection costs, firms may have target debt levels and

still prefer internal funds over costly external ones (Leary and

Roberts (2005) and Strebulaev (2007)).Indeed, there is evidence

that firms have target debt ratios but also prefer internal

financing to external financing (Hovakimian, Opler)

Many companies follow Capital structure as a function of a

trade-off between the tax deductibility of interest payments and

the risk of bankruptcy,

The trade-off theory of capital structure states that a firm selects

an optimal target leverage (TL) ratio that trades off the relative

costs and benefits of debt. Empirically, however, it is well

documented that firms deviate from their TL ratios and do not

rapidly adjust back to their target if they face costs to do so. If

the cost of issuing equity is altered in this fashion, and if the

firm exploits or faces these costs, then the rate at which the firm

adjusts toward a target debt ratio depends on the degree of

equity mispricing.

Long term debt declines with the manager‘s ability inside equity

stake and the firm‘s long term risk but increases with its short term

risk. Short term debt declines with the manager‘s ability and with

short term risk while it increases with equity ownership

1) Most adjustments occur when firms have above-target

(below-target) debt with a financial surplus (deficit).

Firms move toward the target capital structure when

They face a financial deficit/surplus but not in the manner

hypothesized by the traditional Pecking order theory

18)Manager Characteristics

and

Capital Structure:

Theory and Evidence

Journal of Financial and

Quantitative analysis vol. 46, 2011,

University of Washington,

Sanjai Bhagat, Brian Bolton

and Ajay Subramanian

journal of financial and quantitative

analysis vol. 46, 2011, university of

Washington,

Sanjai Bhagat, Brian Bolton, and Ajay

Subramanian in

D) Area :Capital Structure

Research Paper:16

Multiobjective Capital

Structure Modeling: An

Empirical Investigation

of Goal Programming

Model Using Accounting

Proxies by Yamini

Agarwal1, K.

Chandrashekar Iyer1,

and Surendra S. Yadav

in Journal of Accounting

Research Paper 20 :“How

& When do firms adjast

their Capital Structure

towards their target bY

Suku Buyon

Journal of Finance

Vol1,XIII.no6 2008


Equity mispricing impacts the speed at which firms adjust to their

target leverage (TL) and does so in predictable ways depending on

whether the firm is over or under levered. For example, firms that are

above their TL should therefore issue equity (or retire debt) and

adjust more rapidly towards their target when their equity is

overvalued. However, when a firm is undervalued but needs to

reduce leverage, the speed of adjustment is much slower.

The findings support the role of equity mispricing as an important

factor that alters the cost of making capital structure adjustments.

However, when a firm is undervalued but needs to reduce leverage,

the speed of adjustment is much slower. The findings support the

role of equity mispricing as an important factor that alters the cost of

making capital structure adjustments.

A study on the capital structure policies of the private corporate

sector in India presents some very interesting results .The private

corporate enterprises do not have scope for further mobilization of

debt capital in view of the aggressive debt equity ratio.

Preference for short term debt in lieu of long term financing.

Private corporate enterprise had aggressive debt equity ratio

and therefore relatively poor debt service coverage ratio.

The CFOs give more importance to the decisions based on financial

flexibility. and EPS dilution and considers these as the main factors

in the decision to issue stock, But many academics argue that

company value is independent of the number of shares utstanding

and hence EPS dilution is not a decision making factor.

,

Research Papers :21

Equity Mispricing and

Leverage Adjustment

Costs byRichard S.

Warr, William B.

Elliott,Johanna Koeter-

kant

Journal of Financial and

Quantitative analysis

Vol. 47, 2012,.University

of Washington

Research Paper : 27

"The Theory and

Practice of Corporate

Finance: Evidence

From the Field" How

CFOs really Practice

Finance Ronald D.

Watson, Vol. 5,

Financial Management

Association

International

Capital Structure -

Private Corporate

Enterprises Research

Study- Brajkishor

(1951-74), Raut and

Swain (1992-97) Jain

and other (1995-98)

and Suresh Babu and P.

K. Jain (1980-94)


.

Cash levels for Indian borrowers relative to their interest commitments fell to a five-year low after

the central bank raised interest rates a record 13 times since March 2010 to combat inflation and as

operating profits declined, Standard and Poor‘s Indian unit Crisil Ltd said in a report this month.

Corporate earnings will probably post the biggest drop in three years in the fiscal year ending March,

according to analysts‘ estimates.‖ compiled by Bloomberg.

Debt- Equity ratio – After 1993, number of companies showed

substantial increase upto 2004. In 1993, 85% of the companies

were having a maximum debt-equity ratio of 3:1. Till 2004, the

said percent increased to 88% indicating that more and more

companies preferred reasonable and manageable debt-equity

ratios not exceeding 3:1. Infact after 2005, better managed

companies have shown preference for equity rather than debt in

spite of tax advantage in debt finance.

D) Area: Capital Structure

Debt trap looms in convertible bonds

Indian firms may see borrowing costs more than quadruple after the 25% decline

in the Sensex last year--2008

Indian companies with a record $5.3 billion (Rs.27,400 crore today) of convertible

bonds due this year may see borrowing costs more than quadruple after the worst

performance among the world‟s 10 biggest stock markets.

u Reliance Communications Ltd (R-Com), Suzlon Energy Ltd and Tata Steel

Ltd, sold one-third of the total debt, according to data compiled by Bloomberg.

Their shares are trading as much as 88% below the bond conversion prices. Should

they choose to issue debt that can‟t be converted into equity to meet repayments,

companies will face an average yield of 6.94% on dollar-denominated bonds, a

HSBC Holdings Plc index shows, compared with 1.55% on convertible notes,

according to Barclays Capital

u “Companies are heading into a debt trap,”” Raj Kothari, a convertible bond trader

at Sun Global Investments Ltd, said in a phone interview from London on 4

January. “Companies have no option but to repay the debt.

data.Source: Bloomberg, Feb ,2010

u

Source: Analysis and Interpretation of Financial

Statements by Dr.Guruprasad Murthy,2014,

Cash levels for Indian borrowers fell to a five-year low after the

central bank raised interest rates a record 13 times

http://www.livemint.com/2012/01/11202215/Debt-trap-looms-in-convertible.html?atype=tp






Source: Business Standard 4th

December 2013

PSUs with tallest cash stalk


India Inc may find the going tough on Profitability Street

Interest Costs Seen As A Concern For Cos As They Get Set For Year-End

Number Crunching

A dipstick study by ET shows that an economy, which is firing on all cylinders, will push India Inc‘s capacity

utilization into top gear. But, at the same time, there is a possibility that profitability ratios will be dented. And

already, doubts are being raised if corporate India will be able to maintain its 30% return on capital employed.

For the year ended March 31, 2006, the BSE-30 companies had a return on capital employed at 29.54%.

Analysts are in consensus that this number will be down to 27%. The silver lining being — this is on account of

higher capital employed and not because of lower growth in operating profits. Even if operating profits grow at

around 20%, capital employed will grow much faster than that. This will pull down profitability..

Over the past six quarters, sales and profits have moved up continuously on a quarter-on-quarter basis at around

6% and this rate will be maintained for the quarter ended March 2007 as well. Sales growth for 2006 will be higher

than the 20% growth reported in the previous year.

Interest costs are a prime concern, but, in terms of total profitability they will not eat into corporate margins.

Over the past two years, interest costs have shown an escalating trend. It has been able to gallop faster than sales

and profits. Since December 2004, profits and sales of the Sensex 30 club are up 26% and 25%, respectively, but

interest costs are up 28%.

The saving grace is that operating profit margins have not been affected. The rise in interest costs is not so huge

in absolute terms. Interest as a percentage of operating profit is actually on the decline and this may protect the

margins. The interest cover ratio, which states the ability of companies to pay interest costs, is at 4.21 times.

This is in line with the average of 4.25 for the past eight quarters and analysts expect that interest costs should not

be an issue.

Lotus Mutual Fund chief investment officer Tridib Pathak says, ―Interest costs have gone up but that should not

really be the issue. Debt: equity ratios are on the decline as companies are using other sources of finance for their

requirements. I‘m not worried on this front as corporate have planned their fund requirements properly.” Debt

equity ratio has fallen to 0.63:1 from 0.86:1. Since March 2003, debt as a means of finance has gone up 40%,

while net worth has gone up 92%. Requirement of funds have been financed more through equity than debt.

But the total deployment of funds, be it equity or debt, because of a sharp spike upwards threatens to spoil

the party for Corporate India.

By [email protected] Times of India

Since December 2004, profits and sales of the Sensex 30

club are up by 26% and 25%, respectively, but interest

costs are up upto 28%

Higher capital employed and lower growth in

operating profits

javascript:execLinkTarget('[email protected]','EML')












Investments are made during the first period and

commitments to paying high dividends in the second period.

The reputation effect is also supported by the fact that firms

in financial distress are reluctant to cut dividends.

When the dividend tax rate exceeds the capital gains tax rate,

dividend payout can partially offset value-enhancing effects

of leverage. When the two rates are close, dividend payout

loses its moderating influence.

Analysis of influence of tax regime changes shows that the

tradeoff theory does not hold true in the Indian context, as

Indian corporate firms on average do not appear to have

increased dividend payments despite a tilt in tax regime in

favor of more dividends.

Trends indicate that the number of firms paying dividend

during the study period has shown down trend till 2002 and

has risen subsequently and decreased again in 2008. Average

DPS on the other hand has shown a declined till 1999, and

has shown growth from 2002 to 2008. Average percentage

DPR showed a more fluctuating pattern throughout the period

of study.

Analysis also shows that only a few firms have consistently

paid same levels of dividend. Of the payers, regular payers

have consistently paid higher payout as well as higher

average dividend compared to that of current payers.

Initiators have always paid higher levels of dividend yield

compared to that of other payers. Industry trends indicate that

firms in the electricity, mining and diversified industries have

paid higher dividends where as textile companies have paid

less dividends.

The research finding establishes the validity of the Linter

model in the emerging Indian market. The findings establish

the relationship between current dividend as dependent

variable and current earnings and past dividend as

independent variables and results show that Indian firm

relies both on past dividend and current earnings in deciding

the dividend payout

Research Paper 24

The interaction of

corporate dividend policy

and capital structure

decisions under differential

tax regimes

Research Paper 25:

Dividend policy of indian

corporate firms: an

analysis Dr. Sanjay

j.Bhayani

Asia Pacific Journal Of

Research in Business

Management

E)Area :Dividend policy ---


Implications of market inefficiencies, behavioral approach than were in earlier periods.

E) Area :Dividend policy

Lintner, 1956 Dividends are irrelevant; all that matters are the firm‘s investment opportunities.

Rational behavior (more wealth being preferred to less, indifference between cash payments and share

value increases) and perfect certainty (future investments and profits are given) are assumptions of the

theory.

Modigliani and Miller, 1961;

classical study on dividend policy-- dividends represent the primary and active decision variable in

most situations. a model of partial adjustment to a given payout rate .

Bhattacharya (1979) builds a two-period model with two types of firms.

Investments are made during the first period; their expected profitability is known to management, but

not to outside investors. In order to signal the quality of their investment, the managers of good. Firms

(managers are assumed to act in the interest of initial shareholders) will commit to paying high

dividends in the second period. Since attracting outside financing (during the second period) is

expensive due to transaction costs, considered the case of perfect capital markets (no transaction costs

or tax differentials, no pricing power for any of the participants, no information asymmetries or costs),

Kumar 1988 a signaling model –

This model uses taxes as the main cost of dividends;

High dividends are a signal of undervalued shares (high firm quality) - shareholders will have to pay

taxes on them, but they retain a proportionately higher share in the firm, which is valuable to them.

The opposite is true if the firm is overvalued.

Miller andsRock 1985 builds a model that explains dividend smoothing -

Dividends once again signal a firms quality (productivity), but, since they are over invested in the

firm, managers will try to under invest by underreporting a firms productivity.

Kumar 1988 Kumar shows that firms will tend to cluster around optimal dividend levels. Agency

theory suggests that dividends can be used as a means to control a firm‘s management. Distributing

dividends reduces the free cash flow problem and increases the management‘s equity stake. The

question remains why the shareholders would not use debt or share repurchases instead

Shleifer (2000) find that in countries with better shareholder rights firms pay proportionally more

dividends. But there is no evidence that in countries with low investor protection, management will

voluntarily commit itself to pay out higher dividends and to be monitored more frequently by the

market

Allen and Michaely 2002). Fudenberg and Tirole (1995) build a model

that shows that, when managers are risk-averse and more recent information has a higher weight in

assessing their performance, there will be both dividend and earnings smoothing. Another agency

problem is that between shareholders and debt holders. The risk that shareholders will expropriate debt

holders by paying themselves excessive dividends has led to the often encountered covenants

restricting dividend policy in bond contracts. The reputation effect is also supported by the fact that

firms in financial distress are reluctant to cut dividends (DeAngelo and DeAngelo 1990).

The table below indicates, the manner in which theories related to

dividend have been changed over the period of years form 1956to 2012.


In Case of Reliance Industries Ltd(Annual Report of 2008-9),The

Company declared a dividend of Rs 13 per share for the financial

year 2009.

The company‘s Annual Report says ― the dividend payout and

recommended bonus have been formulated keeping in view the

company‟s need for capital for its growth plan s through

internal accruals to the maximum and the ability to serve the

enhanced capital.”

E) Area : Dividend policy Industry

practice

The reason why shareholders believe that bonus issuing companies

giver higher returns are as follows:

Market expectations of an increase in cash flow to the investors because of the

increase in dividend rate

.Increase in liquidity: as the post bonus share price reduces (in the Indian

context) the shares are inviting to the investors. (Liquidity for a stock can be

measured in terms on the number of transactions within a particular time frame ).

The number of transactions post bonus increases for most of the companies issuing

bonus shares.

Bonus issuing companies have gradually decreased their returns as compared to

the non-bonus issuing companies.


Multi-nationals earlier were not allowed to repatriate profits to their parent company.

Therefore the only options left for them were to either issue bonus shares or give dividends

at a very high rate. Post liberalization these companies preferred to give dividends.

Conclusively most of the companies prefer a bonus issue and since the rate of dividend

offered post-bonus does not reduce, the cash dividend increases. Also an interesting fact that

emerges is

the companies that have issued a bonus have been able to generate higher

Returns than companies that don‘t issue bonuses.

Summarized article from The Economic Times of January 13th

2003

titled ‟Rediscovering Dividends,‟ by U. R. Bhat that shows the

preference of the market for capital appreciation is as follows.

Capital gains rather than dividends have been the key attraction to investors

over the years. Investors have held the belief that companies can utilize"

better than investors ―the surplus post tax profit. Therefore the argument

those companies re-investing cash are believed to be the companies to be

with.

The management should take care that the surplus is utilized in the interest

of the shareholders and not empire building and unrelated diversifications.

The Modigliani Miller theorem has had very few exceptional practical

cases. Low payout ratios do not in any case indicate higher future returns. In

fact higher payout ratios have indicated better future prospects.

Thus the payout could ideally be increased and the investment amount

required to be generated through debt or equity. However if the

management strives for achieving a debt-free capital structure then the

financial leverage to increase ROE would be lost.

The misapprehension that equity costs less than debt has been the result of

risk free returns being higher than equity returns. In an uncertain market

where timing the market had been essential for generating high" returns for

appreciating capital paying higher dividends could offer as an advantage for

valuation of stocks.

If value creating investments opportunities are not available at acceptable

levels of risk, the management should serve the interest of the shareholders

by increasing the dividend payout.


A summary of an article - ‟Corporate Dividends & Rationality,‟by

A.V. Rajwade on dividends and rationality of markets is as follows.

It questions the taxation of dividends in the hands of the investor and

argues for dividends and capital appreciation being substitutable in a

rational market.

"The argument often put forward for taxing dividends is that since

dividends paid out of post-tax profits, why should they be taxed again in

the hands of shareholder?

The US is only one of the four OECD countries which taxes dividend

income in the hands of the recipient fully. The UK taxes dividends only if

the recipient falls in the higher tax-paying bracket. Germany considers

only half of the dividend income as taxable and Japan it seems taxes

dividends at a much lower rate.

Mutual funds, for the purpose of escaping the tax, offered an option of

either bonus units or dividends on the investment. Investors were bound

to prefer bonus units as bonus units were taxable but at a much lower rate.

investors are rewarded with either dividends or capital appreciation.

The CAPM model argues that fair value of equity in a company is the

present value of the future dividend as well as the terminal value.

This holds that the company would not be affected by declaring dividends

as the higher the dividend the lower the terminal value of the firm and

vice-versa.

IT companies usually require resources for growth thus these companies

are not friendly toward declaring dividends.

Logically there is no difference between declaring dividends and not

doing the same to use the money to buyback shares from the market.

With respect to short term preference there is a difference between

declaring dividends and capital appreciation. Dividend declaration

requires the managements‘ emphasis on profitability whereas capital

appreciation is market based. Tax-free dividends would be to the

advantage of the shareholders.

It is impractical for a borrower company to declare dividends. At the same

time cash rich companies instead of investing surpluses in low return, risk

free securities should handover the excess to the shareholders else it

would be diluting ROE and hence EPS.

If markets were rational i.e. if the value of the shares would appreciate to

the extent dividends were not declared, the investors would be indifferent

to capital gains or dividend income. The dividends received could be used

to appreciate the investment by buying more shares of the same company

or the increase in share price should take care of the capital appreciation,

provided markets are rational."


The change in perfect efficient market conditions

assumptions of theory—agency cost ,asymmetry information

Cost of capital is driven not only by investors‘ uncertainty

about the firm‘s future, earnings performance, but also by

investors‘ uncertainty about the evolution of beliefs, which

partly determines the path of prices.

Firms experience a lower cost of capital if investors perceive

that other investors are ignoring relevant disclosures

(perceived errors of omission),and higher cost of capital if

investors perceive that others are responding to irrelevant

disclosures (perceived errors of commission).

The panel Regression results show that the maturity of the

debt capital market has significant and positive influence on

the firms' capital structure. In contrast, developments in the

equity capital market have an inverse impact on the debt

ratios of property companies

A sensitivity of investment levels to cash flows indicates that

the cost of internal finance is lower than that of external

finance

The research finding paper gives evidence that the

association between earnings and the cost of debt decreases

as audit fees increase.

There is no evidence that auditor fees directly affect the

cost of debt for the noninvestment-grade firms, but

finding suggests that the association between earnings

and the cost of debt decreases as non audit fees

increase.

Research Papers :23

Disagreement and the

Cost of Capital Robert

Bobert Bloomfield &

Paule, Fischer in Journal

of Accounting Research

Vol. 49 March 2011

Research Paper :

Auditor Fees and Cost of

Debt dan s. dhaliwal*

cristi a. gleason* shane

heitzman*kevin d.

Melendrez

Research Papers :Auditor

Fees and Cost of Debt dan

s. dhaliwal* cristi a.

gleason* shane

heitzman*kevin d.

Melendrez




gleason* shane

heitzman*kevin d.

Melendrez




Research Paper

Agency cost ,growth

options debt

maturity in Indian

corporate sector

Jan 2014 Imdian

Journal of Finance

F-Area :Cost of capital &cost of debt


F-Area : Cost of capital &cost of debt

Industry Practice

High capital cost to impact credit quality of Indian companies'

Global consulting and ratings firm Moody‘s on Thursday said a weak rupee and high cost of borrowings will

impact credit quality of several Indian blue chip companies, especially state-run Indian Oil Corporation, and

private sector companies including Tata Steel and Tata Power.

In its report titled ―Higher borrowing costs, weak rupee will pressure Indian corporate credit metrics‖, Moody‘s

said ―Increased borrowing costs and the weak rupee will pressure the credit quality of rated Indian non-financial

companies.‖

The agency highlighted that the 14 non-financial companies that it rates in India have a combined debt of `2.2

lakh crore ($32 billion) which is maturing in the fiscal ending March 2014. Out of this, over 50 per cent is

denominated in foreign currency.

The report further said depreciation of the Indian rupee will lead to revaluation of debt issued in US dollars, which in turn will put pressure on some covenants.

It said interest rates in India will likely rise further amid measures by the RBI to tighten liquidity and bolster the

rupee.―Interest rates for foreign currency borrowings will also increase in light of the US Federal Reserve‘s

decision to taper its bond-buying programme,‖ the report said.

Referring to IOC, Tata Steel and Tata Power Company, Moody‟s said these companies are highly leveraged

over the next 12 months and face a steeper increase in interest costs. “We believe they will be able to

refinance their maturing debt, but possibly at higher credit spreads than on existing debt,” the report said.

On ONGC, RIL, TCS and GAIL, it said they operate with large cash balances, which provide a buffer .

By ENS Economic Bureau - NEW DELHI 13th September 2013 10:25 AM


Financial managers and investors don‘t operate in a vacuum—they make

decisions within a large and complex financial environment ,This

environment includes financial markets and institutions ,tax and regulatory

policies and the sate of the economy .The environment both defines the

available financial alternatives and affects the outcomes of various

decisions. Therefore it is crucial that financial managers and investors have a

good understanding of the environment in which they operate.

Good financial decisions require good estimates of movements in the

economy, interest rate and the stock market but figuring out what likely

to happen is no trivial matter. Throughout most of the 1990s the financial

environment was extremely favorable. The stock market registered

impressive gains, the economy was strong and both interest rate as well as

inflation was low.

The underlying financial environed has been undergoing tremendous

changes, including breakthroughs in technol.ogy, increased globalization and

shifts in regulatory environment. All of these factors have presented

financial managers and investors with opportunities, but opportunities

accompanied by substantial risk Source: Thesis

`

G) Area: Corporate Decision Making

Citigroup Inc. was created in 1998 when Citigroup and Travelers group (which included

the investment firm Salomon Smith Barney) merged. Citigroup today operates in 100

Countries has roughly 200 million customers and 2.30000 employees .and holds more

than trillion dollars worth of assets .

Citigroup was created because of three important trends

1)A regulatory change made it possible for a U.S.corporation to be engaged in

commercial banking, investment banking and insurance

2) Increased globalization made it desirable to follow their clients and operate in many

countries

3) Changing Technology led to increased economies of scale and scope, both of which

helped spur a rapid consolidation of the financial services Industry.

Financial Management by Myers & Brealey pg no 117


The positive & significant coefficient on growth options

reveals the severity of agency problems in Indian corporate

sector.

The debt equity conflicts over the exercising of growth

options are mitigated by not issuing short term debt. The

maturity matching, debt with collaterals, covenants and long

term debt with call and sinking fund provisions are

appropriate strategies used for mitigating agency problems.

Trends and changes in theories of finance ---shift from pecking order

trade off to contingency needs of an enterprise

Heading1958, Modigliani and Miller have pioneered the

theory of capital structure; consensus has been established

that the capital structure has a significant impact on firm

value (Akhtar, 2005).

Agency cost is also an important cost (Jensen and

Mackling,1976, Myers, 1977), which associates with

negating the conflict of interest between, creditors and

shareholders (Sayeed, 2011).

.

Thesis 3 :The Theory of

Corporate Finance: A

Historical Overview

Michael C. Jensen*

Clifford W. Smith,

Thesis :The Modern

Theory of Corporate

Finance Michael C.

Jensen and Clifford W.

Smith, Jr.,Editors(New

York: McGraw-Hill

Inc., 1984) pp. 2-20

G)Area: Corporate Decision Making


―

Publication: The Economic Times Mumbai; Date: Jan 28, 2014; Section: Economy; Page:

India Inc Can‘t Keep Up with IT‘s Hot Pace

ET INTELLIGENCE GROUP MUMBAI

The impressive earnings show so far in the December quarter, led largely by an upbeat

information technology sector, appears to be waning as a rising number of companies from

other sectors have started reporting lack lustre performances.

Net sales at the aggregate level for a sample of 141 companies, excluding companies from

banking & financial services industry (BFSI) and the oil & gas sector, rose by 12% during

the quarter to December 2013 compared with the year ago period. This was slower than the

14.5% increase in the previous quarter. Operating profit and net profit, on the other

hand, grew at a five-quarter high rate of 22% and 21%, respectively. This shows that

non-IT firms continued to cut costs to retain profit margins at a time when revenue growth

is hard to come by due to slack in overall demand.

Last week, a sample of 44 non-BFSI companies had reported a strong growth of 23% in

revenue and 36% in net profit from the year ago dominated by better growth from software

services companies which had accounted for 82% of aggregate sales of the sample and as

much as 90% of net profit. Results of manufacturing companies have started portraying a

picture of a more growth. The share of IT companies at the end of January 24 has fallen to

46% in sales and 59% in net profit. The sample companies were able to retain operating

margin at over 22.6% during the December quarter on a sequential basis helped by a

moderation in expenses relative to sales.

The efficient management of operating costs has been a key feature of the earnings season

so far. For instance, aggregate net sales of 10 capital goods companies that declared

results for the quarter to December fell by 5% but operating profit and net profit rose

by 16% and 14%, respectively. Similarly, for the 12 textile manufacturers in the sample,

sales rose by 5% while net profit doubled from the year ago. The performance of auto and

auto ancillary companies has been disappointing so far. The 18 companies from this sector

reported a drop of over 9% in revenue and a double digit fall in net profit at the aggregate

level.

Aggregate net sales decreased, but

operating profit,& net profit increased


The Strange interesting History of the Theory of Finance : Peter L.

Bernstein

The collection of theoretical ideas sometimes known as Modern Portfolio Theory, or what I call Capital Ideas,

was composed by a dozen or so men over a period of just 21 years, starting with Harry Markowitz's "Portfolio

Selection" in 1952 and ending with the publication of the Black-Scholes-Merton options pricing model in 1973.

There was no such thing as finance theory before 1952, and there has been no meaningful

addition to the theory of finance since 1973. In the late 1980s, when I began interviews for my book. Capital

Ideas, all these men were still alive and available to talk with me. Nothing in the history of ideas comes close to

matching that bunching of theoretical innovation. Before I go on to support that assertion, a brief overview

is appropriate. Every member of this group worked in the ivory towers, far from the tumults of Wall Street. Some

of them had never owned a share of stock when they did their most important theoretical work. Yet these Capital

Ideas continue to reverberate in the financial markets of today and in the world of portfolio management in more

ways than any of these men could possibly have predicted. Indeed, all the survivors in that group are now active,

implementing theory in the real world of capital markets and investing. Let me recount how this bunching of

theoretical innovation in such a short period of time is unique in intellectual history. Consider, for example, the

history of astronomy and gravity, broadly conceived. There were 169 years between the birth of Copernicus

and the birth of Isaac Newton and 237 years between Newton's birth and Einstein's.That means a span of

406 years from Copernicus to Einstein. Not much opportunity for interchange of ideas among these

enormously important innovators!

Overlaps are more frequent in economics, but close relationships have been rare.

Economics, as we know it, was launched in 1776 with Adam Smith's Wealth of Nations.

David Ricardo was born a few years earlier, in 1772, and was only 18 when Smith died in 1790. Ricardo and

Malthus did overlap and were close friends. Ricardo died in 1823,

while Malthus died nine years later in 1834. At that point, John Stuart Mill, who was born in 1806, was 28 years

old. Mill overlapped with Alfred Marshall, who was born in 1842, but Mill was past his prime by the time

Marshall was productive. Marshall, 41 years senior to John Maynard Keynes, was Keynes's teacher at

Carnbridge, but he had been dead for 12 years when Keynes published his masterpiece. The General Theory of

Employment, Interest, and Money, in 1936 (and probably a good thing, too, because Keynes is harsh on

his old master in this book).

Thus, 160 years would pass between the publication of Wealth of Nations and The General Theory. There

was

nothing during that long span of time to match the clustering of innovative theoretical ideas among a tiny

group of scholars during the 21 years between 1952 and 1973. The story of fmance theory has another twist.

At any point, the line of succession could have been broken, including at the very start.

Harry Markowitz's interest was in operations research. He applied it to investing only after he happened to strike

up a conversation with a stock broker. Bill Sharpe's primary interest had been in transfer pricing— the way

corporations price internal transactions—until Markowitz lured him into asset pricing

Eugene Fama had planned to teach French and play football and baseball. If Fischer Black had not discovered

fmance as a result of meeting Jack Treynor at Arthur D. Little, this whole story might have had a very different

ending. Myroti Scholes turned down a chance to go into his family's publishing business, while Bob Merton, a

mathematician Was lucky enough to work as a research assistant to Paul Sarjiuelson, for whom finance was a

hobby he referred to as "Sunday painting." If any one of these individuals had stayed with his original interests

instead of yielding to the siren call of finance, the way we work today and the research areas we pursue might

look very different from what is actually the case.

Source :Journal OF Finance


One major trend is the

integration of industrial

Organization theories into motivations for

Mergers and acquisitions.

The second major trend is the continued refinement

of ideas related to the impact of taxation on

corporate decision making, especially in the

areas of capital structure and payout policy, and

also in the area of executive compensation.

Sharp departure from prior paradigm is the

increased focus on law and finance, especially on

Corporate governance issues.

The next departure is evidenced by many

authors‘ willingness to adopt behavioral

approaches, including a willingness to assume

that informational inefficiencies are an important

determinant of managerial choices.

Implications of market inefficiencies are more profound

than were, in the earlier periods.

ResearchPapers :Agency

costs, growth options,

debt maturity in Indian

corporate sector– Jan

2014 (Indian Journal Of

Finance

Research Papers

29:Recent

Developments in

Corporate Finance

Major evolutionary

trend Journal of

Financial Economics,

a Brennan prize Prize

winning paper

Research Paper 29-

Recent Developments

in Corporate Finance

Major evolutionary

trend, Edward Elgar

Jay R. Ritter, editor

October 19, 2003

Journal of Financial

Economics,


HCL TECH -The Big Leap

Fastest compounded annual growth rate (CAGR) in dollar-denominated

revenue during five years to September 2013,when compared with larger

peers, including TCS ,Infosys, and Wipro. With higher

growth came better profitability, higher cash flows and a stronger balance

sheet, putting HCL Tech on the ET 500 list of fittest companies

Company grew through organic & inorganic routes to improve profitability

―Clients were no more in the growth phase. Their businesses and IT budgets were

shrinking. We had two options: either to be pessimistic ourselves and cut

investments in new initiatives or to ride the downward wave by investing more and

find growth amidst pessimism, ―said Anant Gupta, president and CEO of HCL

Technologies,

explaining the dilemma in the aftermath of the financial crisis that hit western

economies in 2008.No points for guessing the choice it made, given that HCL Tech

reported the fastest compounded annual growth rate (CAGR) in dollar-denominated

revenue during five years to September 2013,when compared with larger peers,

including TCS,Infosys ,and Wipro. With higher growth came better profitability,

higher cash flows and a stronger balance sheet, putting HCL Tech on the ET 500 list

of fittest companies. Like other IT vendors ,HCL Tech gave customers what they

were demanding software services to run existing operations at lower cost. Unlike

most other vendors, however, it also gave clients an option to invest these cost

savings in solutions that would improve overall process efficiency in the long term.

A major roadblock in this strategy was the lack of size and scalability in enterprise

application solutions. To address this, former CEO Vineet Nayar acquired European

enterprise solutions player Axon in the middle of 2008,a bold move amid the

uncertain demand scenario in the West. Due to higher investment in the total

outsourcing model, its operating margin shrank to a low of 14% in the trailing 12

months to June 2011 from about 18% three years before. But,as business volumes

increased with the new model, the proportion of revenue that did not depend upon

the addition of headcount also increased. As a result, the margin shot up to 21.3% in

the year to September. The challenge for Gupta,who took over from Nayar a year

ago, is to stay competitive amid ever-changing technologies.HCL Tech is well

placed for the future,Gupta said. For long, we have preserved two values very dearly

trust and transparency with clients and our policy to put employees first. These go

beyond our business strategies and form the basis of a sustainable corporate culture,

he said.(by RANJIT SHINDE in Economic Times 21st Jan2014


.

Too much cash-“Corporate Cash-------

-Journal of Finance


SECTION-IV

STUDENT SECTION-IV

6-STUDY OF ARTICLES ON “SURPLUS CASH A MORE SERIOUS

PROBLEM THAN CASH DEFICIT”

Ms. Apurva Rajadhyaksha and Ms. Vaishnavi Patil

MMS first year (2013-15 batch) DR VN BRIMS

6.1 IS SURPLUS CASH A MORE SERIOUS PROBLEM THAN CASH DEFICIT?

Liquidity and Profitability are at logger heads. Reinvestment opportunities are not easy to find

hence 9 companies must have pipeline of successor project to absorb surplus funds from time to

time viz.

Look out for more investment opportunities

Philately, Paintings, and other works of art

Mergers and Acquisitions

Aggressive investment in Research and development

Identify Investment Havens

Buyback of shares

Real estate investment

Scouting for credit worthy corporate borrowings

Acquisitions in foreign countries, looking for good bargains like purchase of

Business in Europe during global Meltdown e.g. TCS, Infosys, and many others.

Retire debt

Deploy cash into sister units.


6.1.1 PSUs must use surplus cash or give them to others to invest: FM

Finance Minister P. Chidambaram asked Cash-rich Central Public Sector Enterprises (CPSEs) to

invest their surplus cash or give others for purpose of investment. Presently, excess funds of some

public sector units (PSUs) are estimated at around Rs. 2.8 lakh crore. The government is working

out guidelines for utilisation of such surplus funds with a view to boost investment and promote

growth. Department of Public Enterprises (DPE)has suggested various investment options including

mutual funds, term deposits, treasury bills and government securities for PSUs.

PSU‘s can deploy their surplus funds in 2 ways –

Either invests their excess funds or pay higher dividend so that surplus funds could be help to fuel

growth and create jobs.

By proper utilisation of surplus cash the country's economy is projected to grow between 6.1 and

6.7 per cent in the current fiscal year.

6.1.2 PM to meet PSU chiefs to discuss plans for investing cash surplus

The problem of surplus cash is so very serious that even the Prime Minister met the PSU‘s chiefs

convincing them of the need to jump-start India's investment cycle with their vast cash surpluses.

The PSU‘s chiefs said that they want to invest but it is difficult as no optimistic assumptions can be

made due to uncertain market demand for new capacity.

They would also red-flag the onerous new public procurement law moving through Parliament

which would make big-ticket purchases for any expansion and even operational expenses by PSUs

a lot slower and trickier from a commercial perspective.

Steel maker SAIL and even capital goods producers like Bharat Heavy Electricals limited (BHEL),

the country's top turbine maker, are not keen on expanding their core business.

They are producing twice that their requirements which floods the market with an excess of goods.

Thus supply exceeds demand and therefore they are exploring other sectors like transportation,

renewable energy, water systems, defence and nuclear energy.


The Prime Minister's Office had directed cash-rich PSUs such as NTPC, Power Grid Corporation,

Oil India BSE, Indian Oil Corporation and NPCIL to invest their excess funds or pay higher

dividend so that the cash could be deployed to drive growth and create jobs elsewhere in the

economy.

6.1.3 RIL earns nearly Rs. 8,000 crore from treasury operations

Sitting on a huge cash pile of nearly Rs. 83,000 crore, polyester-to-petroleum-to-retail

conglomerate has earned close to Rs. 8,000 crore through its treasury operations -- investments of

surplus funds in financial markets -- during the last fiscal year.

Announcing its FY13 annual results, billionaire Mukesh Ambani-led RIL said last week that it had

an "other income" of Rs. 7,998 crore, while its net income grew 32 per cent to Rs. 21,003 crore.

While net profit inched up by a paltry 4.8 per cent in the year, its treasury profit jumped by 29 per

cent to Rs. 7,998 crore from Rs. 6,192 crore in FY12.

The company was sitting on cash mound/ cash equivalent of a staggering Rs. Rs. 82,975 crore,

while its debt stood at Rs. 72,427 crore at the end of the fiscal year 2012-2013.

The company said it is debt-free on a net basis as of March-end.

Reliance is not alone in this. There are at least nine companies which are sitting on a pile of cash

amounting to Rs.1,76,675.46 Cr. These companies are NMDC, Infosys, Coal India etc.


6.2 GLOBAL PICTURE

Companies With More Cash

Than US.

As in the Picture on your left,

US treasury has $32 Billion in

its account. Whereas the 9

S&P500 Companies has cash

and short-term investments

more than what the US Treasury

has.

General Electric (GE) has almost

3 times as much readily

accessible cash as the US

Government.

Now looking at the global picture, even there the scenario is

same as in India. Apple has piles of cash with itself (one of

the global company out of the nine companies which has

more cash than U.S. government).The amount is so huge

that it is humorously suggested that Apple can use one of

the following 10 options to use their staggering surplus cash

viz.

Establish a manned lunar base and keep it running for

8.5 years - cost $35 billion initially then $7.35 billion

annually.

Buy all 63000 worldwide apple Employees $1 million

mansion with change for a couple of Bentleys each.

Go to McDonald‘s and buy everyone in the world 2

big Mac meals 1 vanilla ice-cream cone and a

chocolate chip cookie

Turn yourself into tony Montana and buy one third of

all the illegal drugs in the world

Hire the entire Russian armed forces for two years. –

cost $52.7 billion Use it for good and evil

Hire the rolling stones ($8 million per night) and

make them play every night for the next 34 years

Donate it to United Nations and end world hunger for

over three years. Cost $30 billion a year

Buy 95,238,095,238 Hershey‘s chocolate bars ($1.05

each). Melt them down and cover the whole of

Singapore in chocolate with enough chocolate rain

left to coat Monaco 32 times over.

Buy all 32 NFL team ($32 billion). All 30 MLB teams

($15 billion) all 30 NHL teams ($7 billion). All 30

NBA teams ($11 billion). The 25 most valuable

soccer clubs ($13 billion). Cover the costs of all 12

formula 1 teams for the next 5 years ($6 billion) and

host the Olympic games ($16 billion - London)

Attempt to clone Steve jobs. At $75000 per embryo

and a success rate similar to dolly the sheep (1 in 277)

the attempt would produce 4813 baby Steve‘s.

Companies With

More Cash Than US.

As in the Picture on

your left, US

treasury has $32

Billion in its

account. Whereas

the 9 S&P500

Companies has cash

and short-term

investments more

than what the US

Treasury has.

General Electric (GE)

has almost 3 times

as much readily

accessible cash as

the US Government.



STUDENT SECTION-IV

7- INDIA INC. BEATS CHINESE PEERS IN FINANCIAL HEALTH

Mr. Pratik Pujari


7.1 INDIA INC. BEATS CHINESE PEERS IN FINANCIAL HEALTH

Table 7.1 India and China Relative to the world (Percentage Shares)

In this article, there is an analysis which is made on the basis of combined figures for companies

(excluding banking & financial ones) on the BSE 200 & the Shanghai SSE 180 indices. In the news

item which one presented below for comparison of two – India and China.

News in Business Standard- Monday, 10th

March 2014

INDIA INC. BEATS CHINESE PEERS IN FINANCIAL HEALTH

Indian firms much better return on equity and operating margins – Krishna

Kant- Mumbai


Table 7.2 Ratios of India and China

Ratios India China

Return on Net Worth 14.3% 10.2%

Operating Margins 15.6% 11.4%

Debt – Equity Ratio 1.5% 1%

Asset Turnover Ratio 100 Times 87 Times

Market Capitalization to Total Debt 2.5 Times 1.5 Times

Formulas of above ratios are given below:-

1. Return on Net Worth = (Adjusted Profit After Tax – Preference Dividend) /

Equity Shareholders‘ Funds

2. Operating Margins = Operating Income / Net sales

3. Debt – Equity Ratio = Total Debt / (Equity share Capital + Preference Share Capital)

4. Asset Turnover Ratio = Net Sales / total Assets

5. Market Capitalization to Total Debt = Market Capitalization / Total Debt

Comments

Chinese companies have aggressively expanded their capacity across sectors over the past

few years but their capacity utilization has declined with reduction in demand after Lehman

crisis.

The problem of excess capacity is visible in low asset turnover ratio.

Chinese companies consists only 50% of their total debt in the form of traditional long term

and short term borrowings. Whereas 87% of Indian companies‘ total debt has been consists

in the form of traditional long term and short term borrowings.

According to analysts, this because of a lack of service sector companies in China. India has

more service sector companies. In contrast Chinese market is dominated by manufacturing

companies.

Chinese companies‘ interest cost was 3.6% in the calendar year 2012, against 6.1% for

Indian companies in 2012/13. This enabled Chinese firms to spend a lower portion of their

operating profit on debt servicing than Indian companies.

However, Chinese companies have higher borrowing capacity due to much lower interest

rates than India.


Conclusion

Basically Chinese economy is much ahead of Indian economy. China as a country is much more

progressive than India. We can see in the above Table 1, that showed GDP, Export of goods and

Services and also Purchasing Power Parity remarkably high as compare to India. In this article it is

mentioned that only few ratios of Indian Companies which has given by analysts are better than

Chinese Companies. But in reality, there has been huge difference in Indian Companies and

Chinese Companies.


STUDENT SECTION-IV

8- CMIE –DATABASE INDIA INC SECTOR-WISE FINANCES

Ms. Kalyani Bapat


8.1 CMIE – DATABASE INDIA INC SECTOR-WISE FINANCES

Table 8.1 CMIE – Database India Inc Sector-Wise Finances

All Sectors (Manufacturing, Mining, Electrical, Construction-Real Estate and Non-Financial Sector)

Year Count Total Assets Current Assets Sales Profit Before

Tax Profit After Tax

PAT/ total

assets * 100

sales/total

assets ROI

1993-94 4,102 10,602,949.80 3,417,390.30 4,610,647.10 251,883.00 192,270.60 1.813 0.435 0.789

1994-95 5,485 13,165,328.10 3,908,757.60 5,921,201.80 458,250.10 381,801.90 2.900 0.450 1.304

1995-96 7,079 16,488,015.10 4,623,496.60 7,378,978.60 519,291.80 411,565.10 2.496 0.448 1.117

1996-97 7,472 19,288,242.10 5,403,283.00 8,424,250.10 516,399.30 363,107.40 1.883 0.437 0.822

1997-98 7,335 22,252,137.10 6,093,224.70 9,072,328.10 549,038.80 379,608.10 1.706 0.408 0.696

1998-99 7,828 25,542,115.40 6,852,647.10 10,098,402.90 464,832.00 308,644.50 1.208 0.395 0.478

1999-00 8,630 28,873,570.00 7,438,817.40 11,944,006.30 578,398.30 379,839.00 1.316 0.414 0.544

2000-01 8,986 32,250,308.30 7,884,772.60 13,798,309.30 597,415.70 363,620.20 1.127 0.428 0.482

2001-02 9,330 36,812,843.80 8,764,769.70 14,787,693.10 792,931.20 471,574.20 1.281 0.402 0.515

2002-03 10,373 41,437,751.70 9,636,427.00 17,055,318.40 1,166,608.80 723,003.50 1.745 0.412 0.718

2003-04 13,124 47,852,641.70 11,104,498.90 20,193,036.20 1,846,594.50 1,263,938.50 2.641 0.422 1.115

2004-05 15,156 55,404,243.80 13,216,258.60 24,438,561.40 2,322,476.50 1,682,796.40 3.037 0.441 1.340

2005-06 17,134 66,110,088.00 15,683,448.30 28,460,127.80 2,843,834.30 2,084,054.80 3.152 0.430 1.357

2006-07 18,292 82,338,386.60 19,678,243.30 35,563,095.70 3,976,023.00 2,908,007.40 3.532 0.432 1.525

2007-08 19,225 104,527,210.90 24,888,539.00 42,528,274.10 4,924,564.10 3,537,402.50 3.384 0.407 1.377

2008-09 21,013 128,567,427.90 29,409,328.10 50,925,587.10 4,173,774.70 2,904,910.70 2.259 0.396 0.895

2009-10 23,049 148,576,291.70 32,156,126.30 54,028,057.90 5,165,384.10 3,576,186.90 2.407 0.364 0.875

2010-11 22,274 171,437,431.20 37,568,856.20 62,585,286.00 5,980,135.30 4,157,484.20 2.425 0.365 0.885

2011-12 14,013 186,819,778.70 38,828,790.30 68,738,568.90 5,588,361.70 3,815,648.10 2.042 0.368 0.751

2012-13 9,079 201,778,826.90 39,097,569.80 70,125,529.60 5,778,509.50 3,987,494.50 1.976 0.348 0.687

Grand Total

248,979 1,440,125,589 325,655,245 560,677,260 48,494,707 33,892,959 44 8 18


Graph 8.2 CMIE – Database India Inc Sector-Wise Finances

8.2 RETURN ON TOTAL ASSETS (ROTA- %)

Table 8.3 Sector Wise Return On Total Assets (ROTA- %)

Sectors 1993-94 2012-13

MANUFACTURING 0.347 7.157

MINING 3.656 13.640

ELECTRICAL 0.821 4.611

CONSTRUCTION & REAL ESTATE -0.003 5.570

NONFINANCIAL SERVICE 0.455 5.379



2012-13

All Sectors (Manufacturing, Mining, Electrical, Construction-Real Estate and Non-Financial Sector)

SALES TOTAL ASSETS

Sectors Rs. Million Rank

MANUFACTURING 40144374.3 1

MINING 2299968.4 5

ELECTRICAL 3228020.6 3

CONSTRUCTION &

REAL ESTATE 2600593.3

4

NONFINANCIAL

SERVICE 10574109.6

2

NETWORTH GROSS PROFIT Sectors Rs. Million Rank


MINING 2840802.6 4


CONSTRUCTION &


5

NONFINANCIAL

SERVICE 7460333.7

2

PROFIT AFTER TAX (PAT) PROFIT BEFORE TAX (PBT) Sectors Rs. Million Rank


MINING

669693.6

2


CONSTRUCTION &


4

NONFINANCIAL

SERVICE 118665.3

5

Sectors Rs.

Million Rank


MINING 5344290.4 5


CONSTRUCTION &


4

NONFINANCIAL

SERVICE 19987284.9

2

Sectors Rs.

Million Rank


MINING 1711224.6 3


CONSTRUCTION &


5

NONFINANCIAL

SERVICE 1923809.3

2

Sectors Rs.

Million Rank


MINING 917205.7 2


CONSTRUCTION &


5

NONFINANCIAL

SERVICE 394196.6

3



2012-13

All Sectors (Manufacturing, Mining, Electrical, Construction-Real Estate and Non-Financial

Sector)

PROFIT MARGIN RATIO (%) ASSET TURNOVER RATIO (TIMES)

Sectors PAT/ Sales

X 100 Rank


MINING 29.118 1

ELECTRICAL 6.013 2

CONSTRUCTION & REAL ESTATE

5.587 3

NONFINANCIAL SERVICE 1.122 5

RETURN ON TOTAL ASSETS (%) RETURN ON NET WORTH (%)

Sectors

PAT/ Total

Assets X 100

Rank


MINING 12.531 1

ELECTRICAL 1.805 4

CONSTRUCTION & REAL ESTATE

2.156 3


NETWORTH TURNOVER RATIO (Times) RETURN ON INVESTMENT RATIO (%)

Sectors Sales/Net

Worth Rank


MINING 0.810 5

ELECTRICAL 0.896 4

CONSTRUCTION-REAL ESTATE

1.165 3


Sectors Sales/Total

Assets

Rank


MINING 0.430 3

ELECTRICAL 0.300 5

CONSTRUCTION &

REAL ESTATE 0.386

4

NON FINANCIAL

SERVICE 0.529

2

Sectors

PAT/Net

Worth X

100

Rank


MINING 23.574 1

ELECTRICAL 5.387 4

CONSTRUCTION &

REAL ESTATE 6.511

3

NONFINANCIAL

SERVICE 1.591

5

Sectors ROI Rank


MINING 539.284 1

ELECTRICAL 54.210 4

CONSTRUCTION &

REAL ESTATE 83.226

3

NONFINANCIAL

SERVICE 31.409

5


RANKING BY SIZE

Sectors Sales Total

Assets Net

Worth Gross Profit

PAT PBT Rank Total

Final Rank

MANUFACTURING 1 1 1 1 1 1 6 1

MINING 5 5 4 3 2 2 21 4

ELECTRICAL 3 3 3 4 3 4 20 3

CONSTRUCTION &

REAL ESTATE

4 4 5 5 4 5 27 5

NONFINANCIAL

SERVICE

2 2 2 2 5 3 16 2

RANKING BY PERFORMANCE

Sectors

Profit Margi

n

Asset Turnove

r

ROTA

RONW

Net Worth

Turnover

ROI

Rank

Total

Final Rank

MANUFACTURIN

G 4 1 2 2 1 2 12 4

MINING 1 3 1 1 5 1 12 4

ELECTRICAL 2 5 4 4 4 4 23 2

CONSTRUCTION

& REAL ESTATE 3 4 3 3 3 3 19 3

NONFINANCIAL

SERVICE 5 2 5 5 2 5 24 1

RANKING BASED ON SIZE AND PERFORMANCE

Sectors Size Performance

MANUFACTURING 1 4

MINING 4 4

ELECTRICAL 3 2

CONSTRUCTION & REAL

ESTATE 5 3

NONFINANCIAL SERVICE 2 1

N. B. Lower the rank assigned better the performance.


8.5 CMIE – DATABASE INDIA INC SECTOR-WISE FINANCES - AN OVERVIEW

All Sectors (Manufacturing, Mining, Electrical, Construction-Real Estate and Non-Financial

Sector) 1993-94 to 2012-13

Items PAT / total assets * 100 (%) Sales / total assets (Times) ROTA (%)

Mean 3.635 0.966 3.631

Median 4.070 0.975 3.853

Minimum 0.347 0.801 0.331

Maximum 7.157 1.151 8.002

8.5.1 Manufacturing Sector -1993-94 to 2012-13

Items PAT / total assets * 100

(%)

Sales / total assets

(Times) ROI (%)

Mean 3.635 0.966 3.631

Median 4.070 0.975 3.853

Minimum 0.347 0.801 0.331

Maximum 7.157 1.151 8.002


8.5.2 Mining Sector -1993-94 to 2012-13

Items PAT / total assets * 100 (%) Sales / total assets (Times) ROI (%)

Mean 8.770 0.506 4.530

Median 9.862 0.529 4.976

Minimum 3.656 0.317 1.345

Maximum 13.640 0.621 7.800

8.5.3 Electrical Sector -1993-94 to 2012-13


Mean 2.525 0.32 0.789

Median 2.58 0.324 0.728

Minimum 0.821 0.243 0.315

Maximum 4.611 0.385 1.35


8.5.4 Construction-Real Estate Sector -1993-94 to 2012-13


Mean 2.374 0.443 1.073

Median 1.972 0.431 0.927

Minimum -0.003 0.376 -0.001

Maximum 5.570 0.529 2.901

8.5.5 Non-Financial Sector -1993-94 to 2012-13


Mean 3.189 0.704 2.368

Median 3.626 0.719 2.738

Minimum 0.455 0.529 0.254

Maximum 5.379 0.941 4.285


SECTION-V

9-INDUSTRY SPEAK

This section includes Industry Speak:

Trends in Finance – Banking Industry

Trends in Finance – A View


9.1 TRENDS IN INVESTMENT BANKING INDUSTRY – INDUSTRY SPEAK

Author - Mr. Nityanand Bhangale

The primary activity of investment banks is client servicing, which includes helping clients raise

equity capital by underwriting initial public offerings and facilitating private placement of shares,

raising debt capital, facilitating mergers and acquisitions, and managing investments. Investment

banks are also involved in activities such as proprietary trading, investing, and the development and

sale of equity and debt products.

Investment banking industry deals with the capital assets and cash within the economy. This

industry has grown leaps and bounds in last 40-50 years. Since 1960 till 2008 world economy has

shown tremendous growth in terms of GDP, global trades and cross border flows. Along with the

growth of world economy and globalization of the world cross border capital flows increased

multifold and due to this investment banking industry expanded immensely in terms of size and

value.

This industry has created huge wealth for the all the stakeholders including shareholders, clients

and employees. Based on this growth industry has attracted best of the talent across the world.

However things have changed drastically post 2008 for the industry, post Lehman bankruptcy. In

last 5 years revenue pools have been down significantly and regulatory burden has gone up

multifold. Industry is working today with lot of restrictions in terms how to deal with clients, how

to capitalize the balance sheet, how businesses should be organized and how the transactions have

to be executed. All these changes have put significant restriction on the leverage and brought the

ROE (return on equity) significantly down. As per some industry reports, it was very common for

most of the players to have ROE of 20-25% during 2007/08, these returns have more than halved

and are currently in the range of 8-10%. Most of the players are struggling to keep the ROE above

the cost of equity. The sector has been impacted by the market conditions along with regulatory

changes.

Regulators are pushing the industry towards being more transparent and reduce the risk exposure to

unregulated market areas. Banks needs to get more capital while reducing the leverage and risk

taking. There are restrictions on using the customer assets for business purpose. All these changes

are changing the way business is conducted and the returns generated from the business.


Over the counter (OTC) derivatives products are one of the major contributors to the banks bottom-

line and this is also one of the major product line which creates risk for the banks. Regulators all

over the world are coming out with various regulations such as Dodd Frank Act in the US and

European Markets Infrastructure Regulation (EMIR) in Europe to ensure that OTC derivatives are

standardized, traded on electronic platforms, cleared centrally, collateralized sufficiently and

reported to the regulators. This will make margins shrink in these products.

In last 2-3 years all the global investment banks have gone through huge cost cutting initiatives.

However, these banks could not improve their return on equities because the interest rates have

gone down with greater percentages as the global economy is dwindling and trade volumes and

capital flows have also reduced significantly.

In order to stay profitable and create value for its investors banks need to take drastic steps, only

after cost reduction will not help, they also have to look at their business models and bring the

change in the culture of the people. In order to make things happen banks are working on many

fronts,

- Currently most of the banks are asset aligned and some of them are trying to think cross

assets, merging trading platforms or client servicing infrastructure across asset classes.

- Pushing the costs further down through various initiatives

- Allocating all available resources prudently across all business functions

- Focus on client franchise across segments

- Focus on balance sheet light businesses

- Re align derivatives booking and legal entity structure to optimize capital

- Move towards use of common industry utilities or outsourcing to reduce post trade

processing costs

Interestingly business models are so complex that it will take multiyear strategy to complete these

changes and ensure profitability of the business. Considering the current business model and

product focus of each player, no two players can have same strategy and each bank has to find it‘s

own solution to the current issues. It will be interesting to see what different kind of models develop

over next 2-3 years and what shape this industry takes.

TRENDS IN FINANCE – INDUSTRY SPEAK

The content in this article are the views of the author. Although, the author is an employee of

Nomura Services India Private Limited, the content in the article or the views of the author

should not be construed as those being of Nomura and Nomura is not responsible or liable for

any content of the article or the views of the author expressed therein. The expression

"Nomura" refers to Nomura Services India Private Limited together with its affiliates.


9.2 TRENDS IN BANKING INDUSTRY – INDUSTRY SPEAK

Author - Mr. Ashwini Sharma

The announcement by US Federal Reserve on December 18 that it will lower the monthly pace of

asset purchases by US $ 10 billion to US $ 75 billion starting in January 2014 was a major

economic and financial event bound to affect the global markets particularly in the emerging

economies with weak fundamentals. The Government of India and the Reserve Bank of India

proactively in the recent period to ensure better macroeconomic management and reduce financial

volatilities. This has helped in improving global investor sentiments and several investment houses

turned overweight on India in November-December 2013, even while being underweight on

emerging markets for their portfolio allocation calls for 2014. Nonetheless, with domestic demand

remaining sluggish and investment activity hesitant, the economy does not appear to be out of the

woods, yet. While recessionary headwinds are feeding into corporates‘ and banks‘ balance sheets,

there are some signs that slippages are starting to come off. By now, markets appear to have priced-

in much of the upside and the tipping point could come around the forthcoming general elections. If

political risks are well-managed and a renewed political commitment to reforms is seen to be in

place, both financial markets and the real sector could gain. In the interim, a closer and continuous

monitoring of potential risks and pre-emptive policy action appears to be the need of the hour.

The announcement by US Federal Reserve was expected to be the trigger for substantial impact on

the global financial markets. However, its pressure on bond and equity markets across the globe

was not to the anticipated extent. The Indian markets this time took the announcement more

stoically and better than other emerging markets than the May 22 tapering announcement as the

interim period had been utilized to re-build buffers. The return of capital flows and better

performance on the trade front appears to have abated the pressures on the Indian rupee. But in

future, commitment to reforms and political outcomes will shape the markets.

Rupee remains range-bound in Q3 of 2013-14

The rupee had depreciated sharply, hitting a historic low in end-August when Fed first announced

its taper intention in May 2013, however, unlike that time, the impact of the actual tapering decision

on December 18 on the rupee was not significant. In fact, Q3 of 2013-14 was marked by low

exchange rate volatility with a small appreciation of 0.3 per cent (based on average exchange rate of

Q3 over Q2). In contrast, in Q1 and Q2 the exchange rate was volatile and the rupee depreciated by

3.2 per cent and 10.1 per cent, respectively. Exchange rate stability was to a large extent propelled

by introduction by RBI of a Forex swap window for the public sector oil marketing companies.

Postponement of tapering by the Fed and a lower Current Account Deficit during Q2 of 2013-14


also helped. The Forex buffers built by FCNR(B) deposits and banks‘ overseas foreign currency

borrowings also instilled further confidence.

Monetary Policy measures normalization soften Money market rates

Rates in the money market were range-bound during the early part of July 2013. However, as the

rupee depreciated sharply, the RBI responded with a series of policy measures during July-August

to tighten liquidity and contain exchange rate

volatility. The net effect of these measures led to a significant rise in money market rates across the

spectrum. As markets gradually returned to normalcy, the Reserve Bank effected a calibrated

unwinding of its exceptional measures. As a result, money market rates gradually softened during

Q3 of 2013-14. Having utilized the interim period to build buffers, when the actual path of tapering

was announced in December 2013, the markets were not unduly concerned. From a high of 9.97 per

cent in September 2013, weighted average call rates declined to 8.16 per cent in December 2013. A

similar magnitude of decline was witnessed in the CBLO rate as well. Money market rates have

witnessed some hardening since the second half of December, on the back of tighter liquidity

conditions emanating from advance tax outflows. After initial softening, money market rates

remained elevated during January 2014 so far, reflecting tight liquidity conditions arising out of

elevated government balances with the Reserve Bank and rise in currency in circulation.

Increase in CD issuance

CD issuances was impacted by the tightening in money market rates with the weighted average

effective interest rate (WAEIR) peaking to 11.2 per cent in the early part of September 2013. As

markets returned to normalcy and liquidity conditions improved, rates declined whereas volumes

increased.

Gradual improvement in CP issuance

As in the case with CDs, in response to the exceptional measures by the Reserve Bank of India,

issuance of CPs by firms hit a two-year low, in July 2013. The weighted average discount rate

(WADR) also touched a high of 11.9 per cent at end-August 2013. As the calibrated unwinding

took hold, the volume of issuances picked up and rates declined. Accordingly, the outstanding

amount of CPs also increased.

G-sec yields remained firm in Q3 of 2013-14

The effect of the announcement on May 22, 2013 and the subsequent measures by the Reserve

Bank firmed up government yields to a significant extent. As markets stabilised, the Reserve Bank

announced a cautious unwinding of its earlier measures. More specifically, taking cues from the

OMO purchase auction and a 50 bps reduction in the MSF rate on October 7, 2013, G-sec yields

softened. However, the yields hardened during November 2013 led by a hike in the repo rate by 25

bps on October 29, 2013, better than expected US non-farm payroll numbers and higher domestic


inflation numbers for October 2013. The G-sec yields softened to some extent towards the end of

the month on OMO auction announcement and introduction of new benchmark security.

Yields hardened again in December 2013 on higher domestic inflation numbers for November 2013

and the US Fed tapering announcement, despite getting some support after the policy rate was left

unchanged in the mid-quarter review on December 18, 2013. Thus, during Q3 of 2013-14, G-sec

yields remained firm. However, in the start of Q4 of 2013-14, the yields have softened on better

inflation numbers for December 2013 and on announcement of OMO purchase auction and 28-day

term repo auction. During the year thus far, the government has completed 93 per cent of its overall

borrowings (96 per cent on a net basis) for the year volatility. The net effect of these measures led

to a significant rise in money market rates across the spectrum. As markets gradually returned to

normalcy, the Reserve Bank effected a calibrated unwinding of its exceptional measures. As a

result, money market rates gradually softened during Q3 of 2013-14. Having utilised the interim

period to build buffers, when the actual path of tapering was announced in December 2013, the

markets were not unduly concerned. From a high of 9.97 per cent in September 2013, weighted

average call rates declined to 8.16 per cent in December 2013. A similar magnitude of decline was

witnessed in the CBLO rate as well. Money market rates have witnessed some hardening since the

second half of December, on the back of tighter liquidity conditions emanating from advance tax

outflows. After initial softening, money market rates remained elevated during January 2014 so far,

reflecting tight liquidity conditions arising out of elevated government balances with the Reserve

Bank and rise in currency in circulation.


Increase in CD issuance

CD issuances was impacted by the tightening in money market rates with the weighted average

effective interest rate (WAEIR) peaking to 11.2 per cent in the early part of September 2013. As

markets returned to normalcy and liquidity conditions improved, rates declined whereas volumes

increased.

Gradual improvement in CP issuance

As in the case with CDs, in response to the exceptional measures by the Reserve Bank of India,

issuance of CPs by firms hit a two-year low, in July 2013. The weighted average discount rate

(WADR) also touched a high of 11.9 per cent at end-August 2013. As the calibrated unwinding

took hold, the volume of issuances picked up and rates declined. Accordingly, the outstanding

amount of CPs also increased.

G-sec yields remained firm in Q3 of 2013-14

The effect of the announcement on May 22, 2013 and the subsequent measures by the Reserve

Bank firmed up government yields to a significant extent. As markets stabilised, the Reserve Bank

announced a cautious unwinding of its earlier measures. More specifically, taking cues from the

OMO purchase auction and a 50 bps reduction in the MSF rate on October 7, 2013, G-sec yields

softened. However, the yields hardened during November 2013 led by a hike in the repo rate by 25

bps on October 29, 2013, better than expected US non-farm payroll numbers and higher domestic

inflation numbers for October 2013. The G-sec yields softened to some extent towards the end of

the month on OMO auction announcement and introduction of new benchmark security.

Yields hardened again in December 2013 on higher domestic inflation numbers for November 2013

and the US Fed tapering announcement, despite getting some support after the policy rate was left

unchanged in the mid-quarter review on December 18, 2013. Thus, during Q3 of 2013-14, G-sec

yields remained firm. However, in the start of Q4 of 2013-14, the yields have softened on better

inflation numbers for December 2013 and on announcement of OMO purchase auction and 28-day

term repo auction. During the year thus far, the government has completed 93 per cent of its overall

borrowings (96 per cent on a net basis) for the year.

Inflation indexed bonds launched

The Reserve Bank of India, in consultation with the Government of India launched Inflation

Indexed Bonds (IIBs) for institutional investors, with inflation protection to both principal and

coupon, on June 4, 2013. IIBs have been issued seven times during 2013-14 so far, with an

outstanding amount of `65 billion.

Subsequently, a special series of IIBs for retail investors (such as individuals, trusts and

universities), namely Inflation Indexed National Saving Securities-Cumulative (IINSS-C), was


launched on December 23, 2013. The inflation compensation in this product has been linked to the

combined consumer price index [CPI base: 2010=100] and the interest rate comprises of two parts:

a fixed rate of 1.5 per cent per annum plus an inflation rate based on CPI, with a lag of three

months. The initial response to the new product has been somewhat limited with a subscription of

`603 million till January 25, 2014. As retail investors need more time to understand the product, the

last date for application to the scheme has been extended to March 31, 2014.

Equity market stages a recovery

After initial gains during the early part of the year, the Fed taper announcement had disrupted

global stock markets. During May 22 - August 30, the Sensex and Nifty declined as FIIs withdrew

US$ 13 billion from domestic debt and equity markets. As normalcy returned, the stock market also

recovered. The BSE Sensex and Nifty both increased by over 9 per cent during the third quarter as

compared to a decline in both these indices during the previous quarter. Buoyed by the

demonstrated resilience after the December 18 Fed announcement, key stock market indices rallied

on account of buying by FIIs. However, in line with global sell-offs, Indian equity market witnessed

selling pressure in January 2014 thus far.

FII investments in equity witness a revival

As confidence returned to the markets, FII investments also witnessed a revival. Earlier, FIIs were

net sellers in the debt segment. In December 2013, FIIs turned net investors in the debt segment as

well. Mutual funds, however, continued to remain net sellers in the equity segment, but net buyers

in the debt segment.

Primary equity market continues to remain lackluster

Low earnings growth in the corporate sector and slowdown in investment demand weighed

adversely on the primary equity market. The total amount raised through public and rights issues

was about 90 per cent of the amount raised during the corresponding period of the previous year.

Twenty four of the 25 IPOs during 2013-14 so far were by SMEs who mobilised`2.5 billion.

Resource mobilization by mutual funds also remained low.

House price pressures that abated in Q1 of 2013-14 have shown some signs of increase in Q2. The

y-o-y increase in the Reserve Bank House Price Index (Base year = 2010-11) at the all-India level

was 15.0 per cent in Q2 of 2013-14 as compared to 13.8 per cent in the preceding quarter.

In short, Indian financial markets continue to be better placed as global investor sentiments

improve, but uncertainties remain.

Acknowledgement: RBI website


10 GLIMPSES PRE-BUDGET 2014

Modi promises a second revolution The

times of India 17/5/2014

FII inflows hit $20

billion in six months, all

eyes on Budget TNN |

Jul 7, 2014, 05.53AM Watch: Price Rise

Pinches - Where

Are 'Achche Din

Top 1% in India

owns 8-9% of

national income

,Rockstar

economist Thomas

Piketty says

Book on Capital in

the twenty first

century has put the

spotlight on

Thomas Picketty

Towards economic freedom "

Parliamentary polls of 1977 and this

year are the two most important

elections in the Indian History. The

former was referendum on political

freedom and later on economic

freedom Times of India 5/7/2014

Times of India 5/7/2014

Is socialism dead in India?

Despite major strides in

economic reform over the past

30 years, major aspects of the

Indian economy retain a

smothering level of government

involvement. Narendra Modi‘s

popularity suggests India could

witness a permanent shift away

from the past

India cheapest major economy;

Australia most expensive: Survey

TOI 12 May 2014 high inflation

rate, India is the cheapest major

economy in the world, according

to a survey of global pric

Every Third Indian poor Says

new poverty formula: But the

pace of poverty redaction quicker

in the three years to 2011-12

Business standard July 07

2014Rangarajan panel confirms

decline in poverty

Every Third Indian poor

Says new poverty formula:

But the pace of poverty

readiction quicker in the

three years to 2011-12

Business standard July 07

2014


Reserve Bank of

India's (RBI)

liquidity coverage

guidance is credit

positive for banks ,

Moody's Investors

Service has said.

RBI has issued the

final Basel III

framework on

liquidity standards,

including

guidelines on the

minimum liquidity

Revamped inflation bonds with

higher returns soon: a bid to

move retail investors away from

gold and real estate into financial

instruments, Reserve Bank of

India will soon come out with a

new inflation indexed bond that

will be more attractive to

individuals, RBI TOI 12 Jun 2014,

Sebi relaxes IPOs, OFS

norms to boost primary

markets A change in

shareholding norms is

seen as a measure to

encourage companies to

sell shares and attract

retail investors

Livevemint 9 july 14

�Sebi relaxes IPOs, OFS


marketsA change in





retail investors –

Livevemint 9 july 14

�Sebi relaxes IPOs, OFS


marketsA change in





Monetary prices and asset

prices -The S&P 500 index

of equity prices in U.S.was

at a record high last week

gaining 200%since early

2009.DAX,the Index of

German equities is at an all

time high .The FTSE,all

world index is also at a

record high--live mint

19june 14

Budget 2014:

Factories Act

revamp may signal

labour law

reforms

The Indian market has

underperformed its EM peers in

the past one month Business

standard July 8 ,2014

Digitized

signature –

Novel solution

that enables

organizations to

conduct business

transactions or

agreements over

electronic

devices and

provides

digitised

signatures with

maximum legal

assurance

Development of 10 metro stations

with state-of-the-art facilities

Temperature-controlled storage

for fruits and vegetable Ready-to-

eat meals to be introduced in

phased manners, CCTVs to

monitor cleanliness of stations,

Gowda say


$

Stop press


10 BIBLIOGRAPHY

References:

[01] Anand, Manoj (2002). ‗Corporate Finance Practices in India: A Survey‗, Vikalpa, Vol. 27, No.

4

[02] Bhaduri, Saumitra N. (2002). ‗Determinants of Corporate Borrowing : Some Evidence from

the Indian Corporate Structure‘, Journal of Economics and Finance, Vol. 26, No. 2

[03] Damodaran, Aswath (2002). ‗Corporate Finance‘, 2nd Edition, John Wiley and Sons

[04] Graham J and Harvey C R (2001). ‗The Theory and Practice of Corporate Finance: Evidence

from the Filed‘, Journal of Financial Economics, Vol 60, Nos 2 and 3

[05] Lintner J (1956). ‗Distribution of Incomes of corporations among dividends, retained earnings

and taxes,‗American Economic Review, Vol. 46

[06] Pitabas Mohanty (1999). ‗Dividends and Bonus Policies of Indian Companies: An Analysis‘,

Vikalpa,Vol 24 No. 4

[07] Puritt, Stephen W and Gitman, Lawrence J. (1991). The Interaction between the Investment,

Financingand Dividend Decisions of Major U.S. Firms, The Financial Review, Vol. 26, No. 3

[08] Rao Cherukuri U (1996). ‗Capital Budgeting Practices of Indian and a select south east Asian

countries‘,ASCI Journal of Management, Vol. 25

[09] Ryan, Patricia A. and Ryan, Glenn P. (2002). ‗Capital Budgeting Practices of Fortune 1000:

How have Things Changed?‘, Journal of Business and Management, Vol. 8, No.4

[10]Sen, Dilip Kumar, Jain, Sugan C., Bala, Swapan Kumar (2002). ‗Financial Management Tools:

A Brief Study of their Applicability in the Changing Industrial Environment of Bangladesh‘,

Journal of Accountingand Finance, Vol. 16, No. 1

[11] Sharpe, William F (1964). ‗Capital Asset Prices: A theory of Market Equilibrium under

conditions of risk‘,Journal of Finance, Vol. 19

K. Krishna Murthy and D. U.Sastry; Published by Tata McGraw-Hall Pulishing Co. Ltd. New

Delhi; pp160

Journals:

Loughran, T., Ritter, J.R., 1995. The new issues puzzle, Journal of Finance 50, 23-52.


Lucas, D.J., McDonald, R.L., 1990. Equity issues and stock price dynamics, Journal of Finance 45,

1019-1043.

Mayers, D., 1998. Why firms issue convertible bonds: the matching of financial and real investment

options. Journal of Financial Economics 47, 83-102.

McDonald, R.L., 1998. Real options and rules of thumb in capital budgeting, in Brennan, M.J.,

Trigeorgis, L., (Eds.), Innovation, Infrastructure, and Strategic Options. Oxford University Press,

London.

Miller, M.H., 1977. Debt and taxes. Journal of Finance 32, 261-275.

Modigliani, F., Miller, M.H. 1963. Corporate income taxes and the cost of capital: a correction.

American

Economic Review 53, 433-443.

Moore, J.S., Reichert, A.K., 1983. An analysis of the financial management techniques currently

employed by large U.S. corporations. Journal of Business Finance and Accounting 10, 623-645.

Myers, S.C., 1977. Determinants of corporate borrowing. Journal of Financial Economics 5, 147-

175.

Myers, S.C., 1984. The capital structure puzzle. Journal of Finance 39, 575-592.

Myers, S.C., Majluf, N., 1984. Corporate financing and investment decisions when firms have

information that investors do not have. Journal of Financial Economics 13, 187-224.

Opler, T.C., Pinkowitz, L., Stulz, R., Williamson, R., 1999. The determinants and implications of

corporate cash holdings. Journal of Financial Economics 52, 3-46.

Opler, T.C., Titman, S., 1998. The debt-equity choice, Unpublished working paper, Ohio State

University.

Pinegar, J.M., Wilbricht, L., 1989. What managers think of capital structure theory: a survey.

Financial

Management 18, 82-91.

Poterba, J., Summers, L., 1995. A CEO survey of U.S. companies' time horizon and hurdle rates,

Sloan Management Review, Fall, 43-53.


10 BIBLIOGRAPHY

References:

[01] Anand, Manoj (2002). ‗Corporate Finance Practices in India: A Survey‗, Vikalpa, Vol. 27, No.

4

[02] Bhaduri, Saumitra N. (2002). ‗Determinants of Corporate Borrowing : Some Evidence from

the Indian Corporate Structure‘, Journal of Economics and Finance, Vol. 26, No. 2

[03] Damodaran, Aswath (2002). ‗Corporate Finance‘, 2nd Edition, John Wiley and Sons

[04] Graham J and Harvey C R (2001). ‗The Theory and Practice of Corporate Finance: Evidence

from the Filed‘, Journal of Financial Economics, Vol 60, Nos 2 and 3

[05] Lintner J (1956). ‗Distribution of Incomes of corporations among dividends, retained earnings

and taxes,‗American Economic Review, Vol. 46

[06] Pitabas Mohanty (1999). ‗Dividends and Bonus Policies of Indian Companies: An Analysis‘,

Vikalpa,Vol 24 No. 4

[07] Puritt, Stephen W and Gitman, Lawrence J. (1991). The Interaction between the Investment,

Financingand Dividend Decisions of Major U.S. Firms, The Financial Review, Vol. 26, No. 3

[08] Rao Cherukuri U (1996). ‗Capital Budgeting Practices of Indian and a select south east Asian

countries‘,ASCI Journal of Management, Vol. 25

[09] Ryan, Patricia A. and Ryan, Glenn P. (2002). ‗Capital Budgeting Practices of Fortune 1000:

How have Things Changed?‘, Journal of Business and Management, Vol. 8, No.4

[10]Sen, Dilip Kumar, Jain, Sugan C., Bala, Swapan Kumar (2002). ‗Financial Management Tools:

A Brief Study of their Applicability in the Changing Industrial Environment of Bangladesh‘,

Journal of Accountingand Finance, Vol. 16, No. 1

[11] Sharpe, William F (1964). ‗Capital Asset Prices: A theory of Market Equilibrium under

conditions of risk‘,Journal of Finance, Vol. 19

K. Krishna Murthy and D. U.Sastry; Published by Tata McGraw-Hall Pulishing Co. Ltd. New

Delhi; pp160

Database: CMIE,RBI DATABASE


Journals:

Loughran, T., Ritter, J.R., 1995. The new issues puzzle, Journal of Finance 50, 23-52.

Lucas, D.J., McDonald, R.L., 1990. Equity issues and stock price dynamics, Journal of Finance 45,

1019-1043.

Mayers, D., 1998. Why firms issue convertible bonds: the matching of financial and real investment

options. Journal of Financial Economics 47, 83-102.

McDonald, R.L., 1998. Real options and rules of thumb in capital budgeting, in Brennan, M.J.,

Trigeorgis, L., (Eds.), Innovation, Infrastructure, and Strategic Options. Oxford University Press,

London.

Miller, M.H., 1977. Debt and taxes. Journal of Finance 32, 261-275.

Modigliani, F., Miller, M.H. 1963. Corporate income taxes and the cost of capital: a correction.

American

Economic Review 53, 433-443.

Moore, J.S., Reichert, A.K., 1983. An analysis of the financial management techniques currently

employed by large U.S. corporations. Journal of Business Finance and Accounting 10, 623-645.

Myers, S.C., 1977. Determinants of corporate borrowing. Journal of Financial Economics 5, 147-

175.

Myers, S.C., 1984. The capital structure puzzle. Journal of Finance 39, 575-592.

Myers, S.C., Majluf, N., 1984. Corporate financing and investment decisions when firms have

information that investors do not have. Journal of Financial Economics 13, 187-224.

Opler, T.C., Pinkowitz, L., Stulz, R., Williamson, R., 1999. The determinants and implications of

corporate cash holdings. Journal of Financial Economics 52, 3-46.

Opler, T.C., Titman, S., 1998. The debt-equity choice, Unpublished working paper, Ohio State

University.

Pinegar, J.M., Wilbricht, L., 1989. What managers think of capital structure theory: a survey.

Financial

Management 18, 82-91.

Poterba, J., Summers, L., 1995. A CEO survey of U.S. companies' time horizon and hurdle rates,

Sloan

Management Review, Fall, 43-53.


Ross, S.A., 1977. The determination of financial structure: the incentive signaling approach. Bell

Journal of Economics 8, 1-32.

Sangster, A., 1993. Capital investment appraisal techniques: a survey of current usage. Journal of

Business Finance and Accounting 20, 307-332.

Scott, J. H., 1976. A theory of optimal capital structure. Bell Journal of Economics 7 (1), 33-54.

Shao, L.P., Shao, A.T., 1996. Risk analysis and capital budgeting techniques of U.S. multinational

enterprises. Managerial Finance 22, 41-57.

Sharpe, S.A., Nguyen, H.H., 1995. Capital market imperfection and the incentive to lease. Journal

of Financial Economics 39, 271-294.

Stanley, M.T., Block, S.B., 1984. A survey of multinational capital budgeting. The Financial

Review 19,36-54.Stein, J.C., 1992. Convertible bonds as backdoor equity financing. Journal of

Financial Economics 32, 3-21.Stigler, G.J., 1966. The Theory of Price, Third Edition, Macmillan

Company, New York.

Stulz, R., 1988. Managerial control of voting rights: Financing policies and the market for corporate

control. Journal of Financial Economics 20, 25-54.

Titman, S., 1984. The effect of capital structure on a firm‘s liquidation decision. Journal of

Financial Economics 13, 137-151.

The Theory and Practice of Corporate Finance 28

Financial Analysts Journal,July/August, 86-95.

Journal of Finance 39, 899-917.

Journal of Applied Corporate Finance 1,55-64.Journal of Business 59, 383-404.Journal of

Financial Economics 41, 41-73.


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Dr. V. N. Bedekar Institute Of Management Studies - RESEARCH … · 2014. 7. 26. · Dr. V. N. Bedekar Institute of Management Studies, Thane DR VN BRIMS. Monograph-Trends in Finance