VOLUME NO. 2 (2011), ISSUE N O.

7 (J ULY)

ISSN 0976-2183

IIN NT TE ER RN NA AT TIIO ON NA AL LJ JO OU UR RN NA AL LO OF FR RE ES SE EA AR RC CH H IIN NC CO OM MM ME ER RC CE EA AN ND DM MA AN NA AG GE EM ME EN NT T

Sr. No.

CONTENTS TITLE & NAME OF THE AUTHOR (S)

A CROSS-SECTIONAL STUDY OF ACCEPTANCE OF MENTORING FOR PROFESSIONAL DEVELOPMENT IN EDUCATIONAL INSTITUTIONS IN GULF COUNTRIES DR. IMRAN HAMEED & DR. NAZIA RASOOL QAZI ROLE OF USER FEES IN ETHIOPIA: A CASE STUDY OF JIMMA UNIVERSITY SPECIALIZED HOSPITAL, SOUTH WEST ETHIOPIA DR. DEVI NAIR & KORA TUSHUNE EXPORT GROWTH OF NON OIL SECTOR IN OMAN: THE ERA OF LI!ERALIZATION DR. THRESIAMMA VARGHESE CORPORATE SOCIAL RESPONSI!ILITY: ORGANIZATIONAL COMMITMENT IN THEORY # PRACTISE DR. QADAR BAKHSH BALOCH, IMRAN ULLANH KHAN & SHAHED JAN CORPORATE GOVERNANCE AND PERFORMANCE OF PA&ISTANI LISTED COMPANIES - A CASE STUDY OF SUGAR SECTOR QAISER RAFIQUE YASSER STATE OF FLEXI!LE CAREERS FOR THE WOMAN PROFESSIONAL IN INDIA SAUNDARYA RAJESH WHAT DRIVES THE PERFORMANCE OF COMMERCIAL !AN&S IN ETHIOPIA' DR. DEEPAK KAPUR & ABEBAW KASSIE GUALU NEEDS ASSESSMENT OF EMOTIONAL INTELLIGENCE IN !USINESS EDUCATION KRISHNA PRIYA & DR. K. S. CHANDRASEKAR CREDIT MANAGEMENT OF INDIAN COMMERCIAL VEHICLE INDUSTRY N. VELMATHI & DR. R. GANESAN EVALUATION OF PASSENGER SATISFACTION AND SERVICE +UALITY IN INDIAN RAILWAYS - A CASE STUDY OF SOUTH CENTRAL RAILWAY USING RAIL+UAL M. DEVI PRASAD & DR. B. RAJA SHEKHAR A STUDY OF TERTIARY EDUCATION AND SHIFTS IN GLO!ALLY MO!ILE STUDENTS DR. Y. V. REDDY & D. M. DESHPANDE DIMENSION OF FINANCIAL PERFORMANCE OF CEMENT UNITS IN SOUTH INDIA - AN EMPHIRICAL STUDY ,Z SCORE ANALYSISDR. R. SRINIVASAN & C. U. TIRIPURA SUNDARI AN EMPIRICAL ANALYSIS OF FINANCIAL LEVERAGE, EARNINGS AND DIVIDEND: A CASE STUDY OF MARUTI SUZU&I INDIA LTD. DR. SANJAY J. BHAYANI & DR. BUTALAL AJMERA SERVICES MAR&ETING DYNAMICS AN EXAMINATION OF SPORTS SPONSORSHIP STRATEGIES OF U. &. MAR&ET DR. S. P. RATH, DR. BISWAJIT DAS & CHEF. ANANT BHAMKAR NPA/S SIDE EFFECT AND IT/S CURATIVE MANTRA DR. B. CHANDRA MOHAN PATNAIK, DR. IPSEETA SATPATHY & AROOP KUMAR MOHAPATRA THE ROLE OF EMOTIONAL INTELLIGENCE IN SELF DEVELOPMENT OF DOCTORS AN EMPIRICAL STUDY M. N. R. MANOHAR & A. V. SATYANARAYANA RAO RIS& MINIMIZATION IN SPOT AND DERIVATIVE MAR&ET DR. SUBRATA MUKHERJEE & DR. SAMIR GHOSH IMPORTANCE-PERFORMANCE ANALYSIS ,IPA- TO EXPLORE ORGANIZATIONAL CLIMATE EMPIRICAL EVIDENCE SUBASHINI R & SAMUEL S GOA TOURISM: MYTHS AND REALITIES DR. HIRANMOY ROY SPIRITUALITY AND MANAGEMENT V. NITHYANANTHAN & DR. B. KALPANA ORGANIZATIONAL HEALTH: EXAMINING WOR&PLACE PRACTICES AND WELL-!EING DR. R. PRABHAKARA RAYA & P. SIVAPRAGASAM EMPLOYEESSIXTH PAY COMMISSION: ESTIMATION OF JO! SATISFACTION AMONG CENTRAL GOVERNMENT DR. RAJESH KUMAR SHASTRI & MALAVIKA SINHA PRODUCTIVITY CHANGE IN THE INDIAN HEALTH INSURANCE !USINESS: A MALM+UIST TOTAL FACTOR PRODUCTIVITY ANALYSIS DR. SUMNINDER KAUR BAWA & RUCHITA THE IMPACT OF CAPITAL ADE+UACY RE+UIREMENTS ON PROFITA!ILITY OF PRIVATE !AN&S IN INDIA - A CASE STUDY OF J#&, ICICI, HDFC AND YES !AN& DR. KHALID ASHRAF CHISHTY AN EMPIRICAL STUDY ON EFFECT OF WELFARE MEASURES ON EMPLOYEES/ SATISFACTION IN INDIAN RAILWAYS DR. ASIYA CHAUDHAY & ROOHI IQBAL RE+UEST FOR FEED!AC&

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CHIEF PATRON
PROF. &. &. AGGARWAL
)hancellor" 2in#aya3s 4niversity" Delhi !ounder 5ice-)hancellor" uru obind Sin#h Indraprastha 4niversity" Delhi 67% Pro 5ice-)hancellor" uru Ja0bheshwar 4niversity" +isar

PATRON
SH. RAM !HAJAN AGGARWAL
67% State Minister for +o0e 8 9ouris0" overn0ent of +aryana 5ice-President" Dadri 6ducation Society" )har:hi Dadri President" )hinar Synte7 2td% ;9e7tile Mills<" Bhiwani

COCO-ORDINATOR
DR. SAM!HAV GARG
!aculty" M% M% Institute of Mana#e0ent" Maharishi Mar:andeshwar 4niversity" Mullana" A0bala" +aryana

ADVISORS
PROF. M. S. SENAM RAJU
Director A% )% D%" School of Mana#e0ent Studies" I% %$%O%4%" $ew Delhi

PROF. M. N. SHARMA
)hair0an" M%B%A%" +aryana )olle#e of 9echnolo#y 8 Mana#e0ent" =aithal

PROF. S. L. MAHANDRU
Principal ;Retd%<" Mahara1a A#rasen )olle#e" Ja#adhri

EDITOR
PROF. R. &. SHARMA
Dean ;Acade0ics<" 9ecnia Institute of Advanced Studies" Delhi

COCO-EDITOR
DR. !HAVET
!aculty" M% M% Institute of Mana#e0ent" Maharishi Mar:andeshwar 4niversity" Mullana" A0bala" +aryana

EDITORIAL ADVISORY BOARD

DR. AM!I&A ZUTSHI
!aculty" School of Mana#e0ent 8 Mar:etin#" Dea:in 4niversity" Australia

DR. VIVE& NATRAJAN

!aculty" 2o0ar 4niversity" 4%S%A%

DR. RAJESH MODI

!aculty" /anbu Industrial )olle#e" =in#do0 of Saudi Arabia

PROF. SANJIV MITTAL

4niversity School of Mana#e0ent Studies" uru obind Sin#h I% P% 4niversity" Delhi

PROF. ROSHAN LAL

+ead 8 )onvener Ph% D% Pro#ra00e" M% M% Institute of Mana#e0ent" M% M% 4niversity" Mullana

PROF. ANIL &. SAINI

)hairperson ;)R)<" uru obind Sin#h I% P% 4niversity" Delhi

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DR. &UL!HUSHAN CHANDEL

Reader" +i0achal Pradesh 4niversity" Shi0la

DR. TEJINDER SHARMA

Reader" =uru:shetra 4niversity" =uru:shetra

DR. SAM!HAVNA
!aculty" I%I%9%M%" Delhi

DR. MOHENDER &UMAR GUPTA

Associate Professor" P% J% 2% $% overn0ent )olle#e" !aridabad

DR. SHIVA&UMAR DEENE

Asst% Professor" overn0ent !% % )olle#e )hit#uppa" Bidar" =arnata:a

MOHITA
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ASSOCIATE EDITORS
PROF. NAWA! ALI &HAN
Depart0ent of )o00erce" Ali#arh Musli0 4niversity" Ali#arh" 4%P%

PROF. A!HAY !ANSAL

+ead" Depart0ent of Infor0ation 9echnolo#y" A0ity School of 6n#ineerin# 8 9echnolo#y" A0ity 4niversity" $oida

DR. V. SELVAM
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DR. PARDEEP AHLAWAT

Reader" Institute of Mana#e0ent Studies 8 Research" Maharshi Dayanand 4niversity" Rohta:

S. TA!ASSUM SULTANA
Asst% Professor" Depart0ent of Business Mana#e0ent" Matrusri Institute of P% % Studies" +yderabad

TECHNICAL ADVISOR
AMITA
!aculty" 6%)%)%" Safidon" Jind

MOHITA
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FINANCIAL ADVISORS
DIC&IN GOYAL
Advocate 8 9a7 Adviser" Panch:ula

NEENA
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JITENDER S. CHAHAL
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CALL FOR MANUSCRIPTS

>e invite unpublished novel" ori#inal" e0pirical and hi#h ?uality research wor: pertainin# to recent develop0ents 8 practices in the area of )o0puter" Business" !inance" Mar:etin#" +u0an Resource Mana#e0ent" eneral Mana#e0ent" Ban:in#" Insurance" )orporate overnance and e0er#in# paradi#0s in allied sub1ects li:e Accountin# 6ducation@ Accountin# Infor0ation Syste0s@ Accountin# 9heory 8 Practice@ Auditin#@ Behavioral Accountin#@ Behavioral 6cono0ics@ )orporate !inance@ )ost Accountin#@ 6cono0etrics@ 6cono0ic Develop0ent@ 6cono0ic +istory@ !inancial Institutions 8 Mar:ets@ !inancial Services@ !iscal Policy@ overn0ent 8 $on Profit Accountin#@ Industrial Or#ani*ation@ International 6cono0ics 8 9rade@ International !inance@ Macro 6cono0ics@ Micro 6cono0ics@ Monetary Policy@ Portfolio 8 Security Analysis@ Public Policy 6cono0ics@ Real 6state@ Re#ional 6cono0ics@ 9a7 Accountin#@ Advertisin# 8 Pro0otion Mana#e0ent@ Business 6ducation@ Business Infor0ation Syste0s ;MIS<@ Business 2aw" Public Responsibility 8 6thics@ )o00unication@ Direct Mar:etin#@ 6-)o00erce@ lobal Business@ +ealth )are Ad0inistration@ 2abor Relations 8 +u0an Resource Mana#e0ent@ Mar:etin# Research@ Mar:etin# 9heory 8 Applications@ $onProfit Or#ani*ations@ Office Ad0inistrationAMana#e0ent@ Operations ResearchAStatistics@ Or#ani*ational Behavior 8 9heory@ Or#ani*ational Develop0ent@ ProductionAOperations@ Public Ad0inistration@ Purchasin#AMaterials Mana#e0ent@ Retailin#@ SalesASellin#@ Services@ S0all Business 6ntrepreneurship@ Strate#ic Mana#e0ent Policy@ 9echnolo#yAInnovation@ 9ouris0" +ospitality 8 2eisure@ 9ransportationAPhysical Distribution@ Al#orith0s@ Artificial Intelli#ence@ )o0pilers 8 9ranslation@ )o0puter Aided Desi#n ;)AD<@ )o0puter Aided Manufacturin#@ )o0puter raphics@ )o0puter Or#ani*ation 8 Architecture@ Database Structures 8 Syste0s@ Di#ital 2o#ic@ Discrete Structures@ Internet@ Mana#e0ent Infor0ation Syste0s@ Modelin# 8 Si0ulation@ Multi0edia@ $eural Syste0sA$eural $etwor:s@ $u0erical AnalysisAScientific )o0putin#@ Ob1ect Oriented Pro#ra00in#@ Operatin# Syste0s@ Pro#ra00in# 2an#ua#es@ Robotics@ Sy0bolic 8 !or0al 2o#ic@ >eb Desi#n% 9he above 0entioned trac:s are only indicative" and not e7haustive% Anybody can sub0it the soft copy of hisAher 0anuscript 0123456 in M%S% >ord for0at after preparin# the sa0e as per our sub0ission #uidelines duly available on our website under the headin# #uidelines for sub0ission" at the e0ail addresses" 417849:;5<=504>.;85 or 4178<49:;5.8:=.41%

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AN EMPIRICAL ANALYSIS OF FINANCIAL LEVERAGE, EARNINGS AND DIVIDEND: A CASE STUDY OF MARUTI SUZU&I INDIA LTD.
DR. SANJAY J. BHAYANI ASSOCIATE PROFESSOR DEPARTMENT OF BUSINESS MANAGEMENT SAURASHTRA UNIVERSITY RAJKOT DR. BUTALAL AJMERA ASST. PROFESSOR DEPARTMENT OF BUSINESS ADMINISTRATION BHAVANAGAR UNIVERSITY BHAVANAGAR
A!STRACT
Thi !"!#$ "%%#&!% %' &"(# ") ")"*+%i,"* %-.+ '/ %h#'$#%i,"* "!!$'",h# "). !$",%i,"* "!!*i,"%i') '/ /i)"),i"* *#0#$"1#, #"$)i)1 !#$ h"$# "). .i0i.#). !#$ h"$# '/ M"$-%i U.+'1 L%.. 2i%h ."%" /'$ %h# !#$i'. '/ 3445643 %' 3447648. F'$ %h# !-$!' # '/ ")"*+ i , $# #"$,h#$ h" - #. $"%i' %#,h)i9-# "). %' %# % h+!'%h# i /'$ ,'$$#*"%i')6,'6#//i,i#)% :%; h" <##) - #.. Th# $# -*% '/ %h# %-.+ i).i,"%# %h"% %h#$# i " ,'$$#*"%i') <#%2##) DFL "). EPS "). %h# .i//#$#),# i i) i1)i/i,")% 2h#$# " $# -*% '/ ,'$$#*"%i') ,'#//i,i#)% "% => *#0#* '/ i1)i/i,"),# h'2#. %h"% %h# .i//i.#),# i i1)i/i,")% <#%2##) DFL "). DPS "). EPS "). DPS.

&EYWORDS
!inancial 2evera#e" Dividend" 6arnin#s%

INTRODUCTION
iberalisation" #lobalisation and privati*ation are the i0portant issues to the entrepreneur and corporate threatenin# the e7istence of a fir0% In such a co0ple7 corporate environ0ent" it is the challen#e to the finance 0ana#er to survive the fir0 in lon#- run perspective with the ob1ective of 0a7i0i*in# the ownerLs wealth% >ith a view to achieve this ob1ective" finance 0ana#er is re?uired to pay his due attention on invest0ent decision" financin# decision and dividend decision% Assu0in# that sound invest0ent policy and portunity are there" it is 0y intention in this paper to opti0i*e the financin# decision and dividend decision in the conte7t of achievin# the stated ob1ective% !inancin# decision refers to the selection of appropriate financin#-0i7 and so it relates to the capital structure or levera#e% )apital structure refers to the proportion of lon#- ter0 debt capital and e?uity capital re?uired to finance invest0ent proposal% 9here should be an opti0u0 capital structure" which can be attained by the 1udicious e7ercise of financial levera#e% 9his paper 0ainly concentrates on the e7ercise of financial levera#e in the conte7t of understandin# its i0pact on earnin#s and dividend per share FINANCIAL LEVERAGE !inancial levera#e is pri0arily concerned with the financial activities which involve raisin# of funds fro0 the sources for which a fir0 has to bear a fi7ed char#e% 9hese sources include lon#-ter0 debt ;e%#% bonds" debentures etc%< and preference share capital% 2on#-ter0 debts capital carries a contractual fi7ed rate of interest and its pay0ent is obli#atory% As the debt providers have prior clai0 on inco0e and assets of a fir0 over e?uity shareholders" their rate of interest is #enerally lower than the e7pected return on e?uity shareholders% !urther interest on debt capital is a ta7 deductible e7pense% 9hese two pheno0ena lead to the 0a#nification of rate of return on e?uity capital and hence 6PS% It #oes without sayin# that the effect of chan#es in 6BI9 on the earnin#s per share is shown by the financial levera#e% !inancial levera#e can best be described as Kthe ability of a fir0 to use fi7ed financial char#es to 0a#nify the effect of chan#es in 6BI9 on the fir0Ls earnin# per share%K EARNINGS PER SHARE IN THE CONTEXT OF OPTIMUM CAPITAL STRUCTURE 6arnin#s per share are the reward of an investor for 0a:in# his invest0ent and it is the best 0easure of perfor0ance of a fir0% K9he botto0 line of Inco0e State0ent is an indicator of perfor0ance of Lthin: tan:L or Ltop levelL of the co0panyK% Ordinary investors lac:in# in-depth :nowled#e and inside infor0ation 0ainly based on 6PS to 0a:e their invest0ent decision% So it should be the ob1ective of financial 0ana#e0ent to 0a7i0i*e the 6PS fro0 the view point of both the investor and owners% A#ain the ob1ective of financial 0ana#e0ent is 0a7i0i*ation of value 0easure in ter0s of 0ar:et price of e?uity share of a corporate entity% iven the ob1ective of the fir0 to 0a7i0i*e the value of e?uity share" a fir0 should select a desired co0bination of financin# 0i7 or capital structure to achieve the #oal% 9heoretically" opti0u0 capital structure i0plies that co0bination of debt and e?uity at which overall cost of capital is 0ini0u0 and value of the fir0 is 0a7i0u0% 9he prevailin# view is that the value 0a7i0i*ation criterion as a criterion of opti0al capital structure is 0easured in ter0s of 0ar:et price of e?uity share i%e% the value of the fir0 is 0a7i0i*ed when the 0ar:et price of e?uity share is 0a7i0i*ed% So" accordin# to this view" 0a7i0i*ation of 0ar:et price of e?uity share leadin# to the 0a7i0i*ation of value of the fir0 is a criterion of opti0u0 capital structure% But I be# to differ% Mar:et price of e?uity share thou#h basically depends on fir0Ls earnin#s per share" it also depends to a #reat e7tent on 0any e7ternal factors such as #overn0ent 0onetary and econo0ic policies" political stability" state of econo0y" speculative trends etc% and it 0ay be contended that 0ar:et price of share has no direct bearin# on the opti0u0 capital structure% In this conte7t an e7a0ple of a fir0 0ay be drawn which is runnin# with opti0u0 debt-e?uity co0bination% $ow due to the influence of so0e e7ternal factors i%e% sudden political chan#e or so0ethin# li:e this" the 0ar:et price of its e?uity shares started decreasin# and as a result value of the fir0 went on decreasin#% Due to the downward 0ove0ent of the value of the fir0" its capital structure will not beco0e opti0u0 further and will need restructurin# to beco0e opti0u0 a#ain% In practice" chan#e in 0ar:et price of e?uity share 0ay occur very rapidly and hence it is very difficult to chan#e the co0position of capital structure accordin#ly% )apital structure decision is an internal decision of the fir0% So what I really thin: is that increase in 0ar:et price of e?uity share due to the influence of e7ternal factors leadin# to the 0a7i0i*ation of the value of the fir0 should not be a criterion of opti0u0 capital structure% Rather L6PS 0ay be a better substitute as a criterion of value 0a7i0i*ation in respect of opti0u0 capital structure"3 and as such 0a7i0i*in# 6PS should be the 0ain slo#an or 0ul-0antra of a fir0 in order to reali*e the ob1ective of 0aintainin# an appropriate capital structure% DIVIDEND POLICY DECISION Dividend decision is the 0a1or decision area of financial 0ana#e0ent% A fir0 is to decide what portion of earnin#s would be distributed to the shareholders by way of dividend and what portion of the sa0e would be retained in the fir0 for its future #rowth% Both dividend and retention are desirable but they are conflictin# to each other% A finance 0ana#er should be able to for0ulate a suitable dividend policy" which will satisfy the shareholders without ha0perin# future pro#ress of the fir0% It is co00on that hi#her the earnin#s" hi#her will be the a0ount of dividend and vice-versa%

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FINANCIAL LEVERAGE, EARNINGS AND DIVIDEND 4se of fi7ed cost bearin# capital in the capital structure is ter0ed as financial levera#e% Such capital especially debt is cheaper than the e?uity as the cost of debt is #enerally lower than that of e?uity and a ta7 advanta#e is attached with its use% In this circu0stances" if total capital e0ployed re0ains constant" increase in the financial levera#e or use of debt i0plies that a relatively cheaper source of fund replaces a source of fund havin# relatively hi#her cost% $ow if a co0pany follows this practice its net return will be attributable to the low base of e?uity shareholders ;lower base bein# due to the increase in financial levera#e<%As a result it will lead to the 0a#nification of return to the e?uity and thus 6PS% But one should :eep in 0ind that the sa0e holds #ood in favourable business environ0ent where the co0pany is able to earn a rate of return on invest0ent bein# hi#her than its cost of financin#% So lon# this situation continues the return on e?uity or 6PS will increase with the increase in financial levera#e% 9he e7cess of the rate of return on invest0ent over the fi7ed rate of interest and pref% dividend will #o to the e?uity shareholders% +owever" durin# the period of adversity when the co0pany is not in a position to earn #reater ;at least e?ual< rate of return than the cost of debt and pref% share" its return on e?uity and 6PS" instead of increase" will actually decrease" with the increase in the financial levera#e% As hi#her earnin#s would result in hi#her dividend" the above discussion follows that increase in the use of financial levera#e increases the earnin#s per share and thus dividend per share% )onversely decrease in the use of financial levera#e decreases the earnin#s and dividend per share% =eepin# these theoretical bac:#rounds in view" it is 0y hu0ble effort to draw the attention of readers re#ardin# sub1ectivity of this paper and its applicability into real corporate practice% !or this purpose a case study has been introduced in the ne7t section considerin# the case of Maruti 4dyo# 2i0ited" a leadin# auto0obile co0pany in India% $ow it is proposed to present brief profile of the co0pany in the subse?uent para#raph%

COMPANY PROFILE
Maruti Su*u:i India 2td ;for0erly Maruti 4dyo# 2td< is IndiaLs lar#est passen#er car co0pany" accountin# for over .' per cent of the do0estic car 0ar:et% 9he co0pany offers full ran#e of cars fro0 entry level Maruti G'' 8 Alto to stylish hatchbac: Rit*" A-star" Swift" >a#on R" 6stillo and sedans DMire" SN( and Sports 4tility vehicle rand 5itara% 9he co0pany is a subsidiary of Su*u:i Motor )orporation of Japan% 9he co0pany is en#a#ed in the business of 0anufacturin#" purchase and sale of 0otor vehicles and spare parts ;auto0obiles<% 9he other activities of the co0pany include facilitation of pre-owned car sales" fleet 0ana#e0ent and car financin#% 9hey have four plants" three located at Pala0 ur#aon Road" ur#aon" +aryana and one located at Manesar Industrial 9own" ur#aon" +aryana% 9he co0pany has seven subsidiary co0panies" na0ely Maruti Insurance Business A#ency 2td" Maruti Insurance istribution Services 2td" Maruti Insurance A#ency Solutions 2td" Maruti Insurance A#ency $etwor: 2td" Maruti Insurance A#ency Services 2td Maruti Insurance A#ency 2o#istics 2td and 9rue 5alue Solutions 2td% 9he first si7 subsidiaries are en#a#ed in the business of sellin# 0otor insurance policies to owners of Maruti Su*u:i vehicles and seventh subsidiary" 9rue 5alue Solutions 2td is en#a#ed in the business of sale of certified pre-owned cars under the brand LMaruti 9rue 5alueL% Maruti Su*u:i India 2td was incorporated on !ebruary E(" &JG& with the na0e Maruti 4dyo# 2td% 9he co0pany was for0ed as a #overn0ent co0pany" with Su*u:i as a 0inor partner" to 0a:e a peopleLs car for 0iddle class India% Over the years" the co0panyLs product ran#e has widened" ownership has chan#ed hands and the custo0er has evolved% In October E" &JGE" the co0pany si#ned the license and 1oint venture a#ree0ent with Su*u:i Motor )orporation" Japan% In the year &JG-" the co0pany started their productions and launched Maruti G''% In the year &JG(" they introduced Maruti O0ni and durin# the ne7t year" they launched Maruti ypsy in the 0ar:et% In the year &JGI" the co0pany forayed into the forei#n 0ar:et by e7portin# first lot of .'' cars to +un#ary% In the year &JJ'" the co0pany launched IndiaLs first three-bo7 car" Sedan% In the year &JJE" Su*u:i Motor )orporation" Japan increased their sta:e in the co0pany to .'O% In the year &JJ-" they introduced the Maruti Men and in the ne7t year they launched Maruti 6stee0 in the 0ar:et% In the year &JJ." the co0pany co00enced their second plant% In the year &JJI" they started Maruti Service Master as 0odel wor:shop in India to loo: after sales services% In the year &JJJ" the third plant with new press" paint and asse0bly shops beca0e operational% In the year E'''" the co0pany launched Maruti Alto in the 0ar:et% In the year E''E" Su*u:i Motor )orporation increased their sta:e in the co0pany to .(%EO% In January E''E" the co0pany introduced &' finance co0panies ;G P EJ5s< in Mu0bai% Also" they found one new business se#0ent" Maruti 9rue 5alue for sales" purchase and trade of pre-owned cars in India% In the year E''." the co0pany launched the first world strate#ic 0odel fro0 Su*u:i Motor )orporation Lthe S>I!9L in India% In the year E''H" they launched >a#anR Duo with 2P and also the $ew Men 6stillo% Durin# the year E''H-'I" the co0pany co00enced operations in the new car plant and the diesel en#ine facility at Manesar" +aryana% In $ove0ber E''H" they inau#urated a new institute of Drivin# 9rainin# and Research ;ID9R<" which was set up as a collaborative pro1ect with Delhi overn0ent at Sarai =ale =han in South Delhi% Durin# the year E''I-'G" the co0pany si#ned an a#ree0ent with the Adani #roup for e7portin# E''"''' units annually throu#h the Mundra port in u1arat% 9hey launched Swift Diesel and SN(- 2u7ury Sedan with 9a# line LM6$ AR6 BA)=L durin# the year% In July E''I" the co0pany launched the new rand 5itara" a stylish" 0uscular and .-seater in the M45 se#0ent% 9he co0pany chan#ed their na0e fro0 Maruti 4dyo# 2td to Maruti Su*u:i India 2td with effect fro0 Septe0ber &I" E''I%Durin# the year" the co0pany entered into a 1oint venture a#ree0ent with Ma#neti Marelli Powertrain SpA and for0ed Ma#neti Marelli Powertrain India Pvt 2td for 0anufacturin# 6lectric )ontrol 4nits% Also they entered into another 1oint venture a#ree0ent with !utaba Industrial )o 2td and for0ed !MI Auto0otive )o0ponents 2td for 0anufacturin# 67haust Syste0s )o0ponents% Durin# the year" the co0pany 0ade pact with Shrira0 )ity 4nion !inance 2td" a part of Shrira0 roup" )hennai" to offer easy" transparent and hassle-free car finance to their custo0ers" particularly in se0i urban and rural 0ar:ets% 9he a#ree0ent is a 1oint initiative of the two co0panies for providin# co0petitive car finance to people in 9ier-II and 9ier-III cities across the country% Durin# the year E''G-'J" the co0pany launched a new AE se#0ent car" branded the A-star in India and in 6urope as the new Alto% 9hey raised their production capacity to a land0ar: & 0illion cars% In June E''G" the co0pany launched Maruti G'' Duo" which is a dual fuel ;2P -cu0- petrol< 0odel car% In March E''J" the co0pany launched A-star or Su*u:i Alto at eneva Motor Show sales be#in at 64% In April E''J" the co0pany revealed new Rit* =&EM en#ine at ur#aon plant% 9he co0pany plans to 0oderni*e so0e part of their ur#aon plant" e7pand their =-series capacity" invest further in new 0odel develop0ent and ta:e the pro1ects of test trac: and crash course facility and Brand )entres further%

O!JECTIVES OF STUDY
9he ob1ectives of the study are as underB &% 9o study the 0ethods of raisin# finance and financial levera#e practice of the co0pany E% 9o 67a0ine the i0pact of financial levera#e on 6PS -% 9o :now about the dividend policy of the co0pany (% 9o assess the inter relationship between de#ree of financial levera#e ;D!2<" earnin#s per share ;6PS< and dividend per share ;DPS< .% 9o su00aries 0ain findin# of the study and offer so0e su##estion" if any" for i0provin# 6PS by the use of financial levera#e

HYPOTHESIS
In order to reali*e the above ob1ectives" the followin# hypothesis has been for0ulated% &% 9he co0pany uses debt as a cheaper source of finance than e?uity E% 9he co0pany is enable to earn a hi#her rate of return on invest0ent than the cost of financin# invest0ent% -% D!2 and 6PS are positively correlated in such a 0anner that increase in financial levera#e leads to increase in the 6PS (% D!2 is positively correlated with DPS% .% 6PS is positive correlated with DPS

RESEARCH METHODOLOGY
COLLECTION OF DATA 9he data of Maruti 4dyo# 2td% have been collected fro0 the annual reports of the co0pany and capitaline data base% 9he data collected fro0 this source have been used nd co0piled with due care as per re?uire0ent of the study%

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PERIOD OF STUDY 9he present study covers a period of ei#ht years fro0 E''&-'E to E''G-'J% TECHNI+UES OF ANALYSIS 9he study has been 0ade by convertin# the collected data in to relative 0easures such as ratios" percenat#ae rather than absolute one% !or analy*in# the de#ree of association between D!2" 6PS and DPS" statistical techni?ue of Pearson3s correlation analysis has been used to 1ud#e whether the calculated correlation coefficient are si#nificant or not%

EMPIRICAL ANALYSIS
260: E''&-'E E''E-'E''--'( E''(-'. E''.-'H E''H-'I E''I-'G E''G-'J T830> ;0@430> --H-%-..( -J'-%& (HGH%( ..E(%I(G(%I J-&.%H &''(-%G L81= 36:5 65@>826G H.H (.H -&&%J -'I%H I&%I H-'%G J''%E HJG%J EHA432 ED0:6 ;0@430> &-E%&((%. &((%. &((%. &((%. &((%. &((%. &((%. TA!LE -1: COMPUTATIONS OF E!IT, E!T # EAT R6E6:F6 N63 E!IT I136:6 I EA:@>AE J8:3D E3 E.I. EI'I%&J.%II EJ.-%. -'JG --(%G .E%I -((H%I -.J&%E G&-%E (-%( (E-(%(-IG%G &-('%J -H .-'G%& .(.E%H &II'%( E'%( HI'J%( HG.-%J E-&I%( -I%H GEI'%J G(&.%( E.HE%H .J%H JE''%( J-((%J &IEH%G .& SourceB Annual reports of Maruti 4dyo# 2td% E0:141= K678:6 30L ,E!T&&G%EGE%& IHJ%G &-'(%J &I.' EEIJ%G E.'&HI.%G E0:141= G4F4G61G -J%I (E%I (-%.I%G &'&%& &-' &((%. &'&%& A736: 30L ,EAT&&G%EGE%& IHJ%G &-'(%J &I.' EEIJ%G E.'&HI.%G

TA!LE -2: COMPUTATION OF DFL, EPS, DPS, DIP RATIO, COST OF DE!T, COST OF E+UITY AND RATE OF RETURN ON INVESTMENT year D!2 6PS DPS Dividend pay- Rate of )ost of )ost of Rate of return on ;Rs%< ;Rs%< out ratioO Interest ;O< Debt ;O< e?uity ;O< invest0ent ;O< E''&-'E &%H. IG%JJ -'%'& -I%JJ H%G (%I &%.' -%. E''E-'E''--'( E''(-'. E''.-'H E''H-'I E''I-'G E''G-'J &%&J &%'H &%'&%'& &%'E &%'E &%'(%GG &G%.H EJ%E. ('%H. .-%EJ .J%'(&%.I &%(G &%.' E%'' -%.' (%.' .%'' -%.' -'%-& G%'I H%G( G%H G%(( G%(I G%(& &&%I &&%H &-%J &&%I EG%. H%' H%H G%& G%' J%H G%& &J%H (%& (%H &%.G &%(' &%H& E%-& E%-G E%&& &%E' I%J &J%I EI%G -&%I -'%. EH%J &H%I

SourceB Annual reports of Maruti 4dyo# 2td% NOTES AND EXPLANATIONS &% D!2 Q De#ree of !inancial 2evera#e Q 6BI9 I 6B9 E% 6PS Q 6A9 A $o% of 6?uity Shares% -% DPS Q Dividend A $o% of 6?uity Shares% (% DIP Ratio Q DPS A 6PS 7 &'' .% Rate of Interest Q ;Interest A 2on#-ter0 debt< N &'' H% Interest on debt capital is an allowable e7penditure for inco0e ta7 purpose and it ?ualifies for deduction in co0putin# ta7able inco0e% So it reduces effective cost of debt in the followin# wayB )ost of debt ;O< Q Rate of Interest ;& - ta7 rate<%9a7 rate varied over the years with the chan#es in 9a7 2e#islations% 9a7 rate bein# not available has been co0puted by appro7i0atin# it to be e?uivalent of ta7 provisions% So an avera#e ta7 rate has been appro7i0ated as ;9otal of G yearsL provision for ta7 P 9otal of G yearsL profit before ta7< N &''" which co0es -&O appro7% in case of Maruti 4dyo# 2td% I% 9he return e7pected by the e?uity shareholders 0ay be referred to as cost of e?uity% 9here are various 0odels for its co0putation% But in real ter0 a fir0 has to incur cost in respect of e?uity shares in the for0 of dividend pay0ent% So the 0ost suitable for0ula is B )ost of e?uity ;O< Q ;Dividend A 6?uity or $et worth< 7 &'' G% Rate of return on invest0ent Q ;6A9 A 9otal )apital 60ployed< 7 &'' ,4- F4101;40> >6F6:0=6 @:0;34;6 01G EPS 87 M0:A34 UG28= L3G. !ro0 the table -E as presented above " it is seen that Maruti 4dyo# 2td% Did not find debt capital than e?uity capital over the period of ei#ht years fro0 E''&-'E to E''G-'J% Maruti 4dyo# 2td% had to pay hi#her rate of interest ladin# to a #reater cost of debt than that of e?uity despite an avera#e ta7 advanta#e attached with debt financin# R -&O over the period covered our study% )ontrary to the co00on supposition debt bein# cheaper than e?uity" it is surprisin# to note that the lower cost of debt ;(%&O< in E''I-'G and the #reater cost of e?uity ;E%-GO< as evidence in the year of E''H-'I% Maruti 4dyo# 2td% en1oyed e?uity as a cheaper source of finance by 0aintainin# a lower pay-out ratio% So the basic assu0ption of the proposition which 0a:es levera#e advanta#eous was not fulfilled% As a result levera#e benefits did not true in case of M42% In the year E''&-'E " M42 used hi#hest D!2 ;&%H.< resultin# hi#her 6PS ;as%IG%JJ< over the whole period of ei#ht years under consideration% Althou#h this year ;alon# with seven years prospective years< yielded lower rate of invest0ent ;-%.O< than after ta7 cost of debt ;(%IO<% It 0ade the co0pany conservative in usin# debt financin# and the co0pany started decreasin# its D!2 &%&J to &%'- durin# the period of ne7t years under consideration% If one loo:s at the financial data of M42" #iven in table-E a declinin# trend to 6PS with decline in D!2 beco0e evident% 9he table shows that 6PS was increasin# fro0 &G%.H to as .J%'- with the decrease in D!2 fro0 &%H. to &%'E durin# the period of first si7 years fro0 E''&-'E to E''G-'J% In the year In the year E''E-'-" 6PS decreased to (%GG a#ainst Rs% IG%JJ in E''&-'E with the decrease in D!2 fro0 &%H. to &%&J% 9his 0i#ht have ta:en place owin# to the fact that this year debt carried the hi#her rate of interest ;;&&%IO< leadin# to the hi#her cost of debt ;G%&O<% In the last year of consideration 6PS decreased with the increased D!2% Successive 6PS of last two years showed a fluctuatin# trend with the increase in D!2 li:e all the precedin# years% So there is a clear conflict between the accepted levera#e theore0s and actual practiced in Maruti 4dyo# 2td% In theory there is a positive relationship between D!2 and 6PS in such a way correspondin# increase or decrease in D!2 with the fulfill0ent of 0ain two criteria , one bein# dent capital cheaper than e?uity capital and another bein# rate of return on invest0ent e7ceeded ;after-ta7< cost of debt% But in case of M42" a different relationship between D!2 and 6PS is evident fro0 the data% 6ven M42 could not fulfill the second criterion" 1ust indicated" for all the years" it failed to fulfill the first criterion for every year% 9he co0pany could not en1oy debt as cheaper 0eans of financin# over the whole period% Particularly the Indian corporate sector en1oys e?uity as a cheaper source of financin# since dividend pay0ent is optional here% 9he case of M42 discussed in this study" 1ust a representative one% CAPITAL STRUCTURE POLICY OF MUL 9he lo#ic of capital structure policy of M42 is to increase its net worth by plou#hin# bac: of profit in this way to reduce cost of e?uity as a cheaper cost if its networth is stren#then by plou#hin# bac: of profits" which is not dividend bearin#% $ow if we have a 0ar: on 9able-& " an increase a0ount of reserve and surplus included in net worth is seen all over the period of ei#ht years% =eepin# the e?uity capital constant throu#hout the period of study" the co0pany increased its

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net-worth with the utili*ation of reserve 8 surplus by the sa0e a0ount% 9he co0pany increased its capitali*ation fro0 Rs% --H-%- )r% to &''(-%G )r% with the correspondin#ly less increase in the use of lon# ter0 debt fro0 Rs% H.H cr% to HJG%J cr% durin# the study% Both the e7cess capitali*ation and sli#htly increase in the use of debt in each year were co00ensurated by the reserve and surplus i%e%" by successful plou#hin# bac: of profit instead of 0a:in# additional issue of e?uity shares% If the sa0e was 0ade by fresh issue of e?uity shares the co0pany would not be able to reward its shareholders 0ore in ter0s of return% Since reserve 8 surplus was not divided bearin#" its utili*ation brou#ht down the cost of e?uity and at the sa0e ti0e it 0aintained the lower base of e?uity share- holders resultin# hi#her a0ount of 6PS ;lower base 0eans lower nu0ber of e?uity shares<% TA!LE 3: ANALYSIS OF CAPITAL STRUCTURE
Oof $et worth year 6?uity capital O E''&-'E (%J E''E-'- (%I E''--'( (%' E''(-'. -%E''.-'H E%I E''H-'I E%& E''I-'G &%I E''G-'J &%. Reserve S surplus ;O< J.%& J.%JH%' JH%I JI%JI%J JG%JG%. O of )apital 60ployed 2on# ter0 e0ployed &J%. &E%G G%' H%H &%G%( J%I I%' 6?uity share capital -%J (%& -%I -%& E%H &%J &%H &%( Reserve S surplus IH%H G-%& GG%J'%( JH%& GJ%H GG%G J&%H

SourceB Annual reports of Maruti 4dyo# 2td% 9able-- has been prepared to reflect the relative 0ethod of finance adopted by the co0pany% It is seen fro0 the table , - that the net-worth of the co0pany constituted e?uity capital and reserve 8 surplus and it was (%JO of e?uity capital and J.%&O of reserve 8 surplus in the year E''&-'E% In the followin# years the co0pany stated increasin# the proportion of reserve 8 surplus fro0 J.%-O to JG%.O with decrease in the proportion of e?uity capital fro0 (%IO to &%.O durin# the period fro0 E''E-'- to E''G-'J% One can observe fro0 the table that a percenta#e decrease in the e?uity capital led to the sa0e percenta#e increase in the reserve and surplus% !or e7a0ple .O percenta#e decrease in e?uity capital led to .. increases in the reserve and surplus in the second year of study and so on% 9hus increase in the proportion of reserve and surplus to net worth in this way 0i#ht cause reduction in the cost of e?uity durin# the study period% 9he sa0e analysis 0ay be drawn fro0 table -- about lon#-ter0 debt" e?uity share capital and Reserve 8 surplus to capital e0ployed% DIVIDEND POLICY OF MUL 9able-E shows that DPS of first two years of consideration is sa0e and thereafter the co0pany has been increasin# DPS at a slow rate% 9he dividend payout ratio of the co0pany is #radually decreasin# durin# the study period% Overall" we can say that M42 is followin# a conservative dividend policy FINANCIAL LEVERAGE, EARNING AND DIVIDEND 9he first findin# follows that the co0pany has been e7periencin# a converse effect of financin# levera#e on earnin#s per share and as such earnin#s per share and as such earnin#s per share has been increasin# with the decrease in the financial levera#e% $ow if we want to establish a relationship between financial levera#e" earnin#s per share and dividend per share has been increasin# with decrease in the earnin# per share and decrease in the de#ree of financial levera#e with the e7ception of the year E''I-'G as evident fro0 9able-E% eneral view is that hi#her the earnin#s" #reater is the dividend and vice-versa% In the second year consideration" there is no chan#e in the DPS throu#h there is a sli#ht increase in the 6PS% Al0ost in all the re0ainin# years there is an increase in DPS with the increase in the 6PS e7cept E''I-'J% But the proportionate increase in DPS is less than that of 6PS durin# the period of si7 years fro0 E''E-'- to E''H-'I% As a conse?uence DAP ratio has been decreasin# durin# the study period% CORRELATION ANALYSIS TA!LE ": RELATIONSHIP !ETWEEN DFL, EPS # DPS
Relationship between D!2"6PS and DPS )orrelation co-efficent )alculated KtK value of r & D!28 6PS '%(G &%(G E D!2 8 DPS '%JH%EGT 6PS8DPS '%I. E%IGT ;&< $oteB 9able value of ;n-E< i%e H de#ree of freedo0 at .O level of si#nificance is &%JH

SourceB co0puted with the data obtained fro0 table-E 9he co-efficient of correlation in between D!2" 6PS and DPS are presented in 9able-( to assess to closeness of association between each other% It is evident fro0 the table that the co-relation" co-efficient between D!2 and 6PS is '%(G% It indicates that there is a positive association between D!2 and 6PS supportin# the e7planation #iven earlier the value of correlation co-efficient is also found to be hi#hly insi#nificant at .O level of si#nificance" as the calculated 9 value of &%(G is lesser than the table value of &%JH% So the hypothesis that D!2 and 6PS are positively correlated is outri#ht accepted% +ere the data as obtained fro0 the annual report of M42 are consistent with the assu0ption that the hypothesis is true% In order to assess the de#ree of association between D!2 and DPS" correlation coefficient between these two variables has been calculated% It is seen that correlation co-efficient between D!2 and DPS is ;'%JH< indicatin# that there is a hi#h de#ree of positive correlation between D!2 and DPS% 9he value of correlation co-efficient is found to be 0uch insi#nificant at .. levels% 2astly" the co-efficient of correlation between 6PS and DPS is ;'%I.< which is also insi#nificant at .O level% 9he study on the inter relationship between the de#ree of financial levera#e" earnin# per share and dividend per share of M42 showed both positive and ne#ative association% !or the purposes of study" the correlation co-efficient of three sets of selected variables have been analy*ed% 9he si#n of correlation coefficient between ;i< D!2 and DPS and ;II< 6PS and DPS are not confor0ed to hypotheses that D!2 is positively correlated with DPS and 6PS% 9he data could not provide any evidence of the hypothesis% So this hypothesis is not accepted to be true case M42% 9he result of correlation co-efficient between 6PS and DPS is what we have not e7pected% So the hypothesis that 6PS is positively correlated with DPS 0i#ht be re1ected to be false in case of M42

CONCLUSION
M42 could not en1oy the benefit of accepted levera#e theore0% Rather it accrued operation of financial levera#e% So levera#e theore0 is not a #eneral rule% 9he dividend policy of the co0pany is conservative% 9he co0pany has been 0aintainin# a decreasin# trend in its dividend pay-out% 9he co0pany was enablin# to 0a7i0i*e the 6PS by the reverse operation of financial levera#e% 9he co0pany successfully pulled down the de#ree of financial levera#e to reap the 6PS advanta#e% 9hus the ob1ective of this paper to 0a7i0i*e the 6PS throu#h 1udicious operation of financial levera#e has been fulfilled

REFERENCES
&% E% -% (% .% H% I% G% it0a"J%2%" Principle of 0ana#erial !inance" +arper 8 Row" $ew /or: "p%G( +yderabad" R%2%" 6PS 0ana#e0entB an analysis" 9he Mana#e0ent Accountant" 5ol%-E $o%- March" &JJI% Patra"Santi0oy" effect of debt financin# on capital structure decision" 9he Mana#e0ent Accoutant"5ol%-."$o%J"Septe0ber"E''' )o0psey" B%J%" 6u#ene !%Bri#ht0an% Introduction to !inancial Mana#e0ent% 9he Dry den press" $ew /or:" &JG." p%.--% =han"M%/ and %Jain"P%=%" !inancial Mana#e0ent" te7t 8 Proble0s" 9ata Mc raw-+ill Publishin# )o ltd%" $ew Delhi"&JJE% Baner1ee" B%" !inancial Policy and Mana#e0ent Accountin#" 9he world Press Pvt% 2td%" )alcutta" &JJ.% +% % #uth0ann and +%6% Dou#hall" )orporate !inancial policy" ;$ew /or:B Prentice +all" &J..<% P%-GI% Ja0es 6% >alter"F Deter0ination of technical SolvencyF 9he 1ournal of business" 5ol%-'" Jan" &J.I" pp% -'% -'-(-%

INTERNATIONAL JOURNAL OF RESEARCH IN COMMERCE # MANAGEMENT

A Monthly Double-Blind Peer Reviewed Refereed Open Access International e-Journal - Included in the International Serial Directories

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VOLUME NO: 2 (2011), ISSUE NO. 7 (J ULY)

ISSN 0976-2183

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INTERNATIONAL JOURNAL OF RESEARCH IN COMMERCE # MANAGEMENT

A Monthly Double-Blind Peer Reviewed Refereed Open Access International e-Journal - Included in the International Serial Directories

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