Apollo Tyres Ltd.

Investment Decision Dilemma

Submitted to : Submitted By :

Dr. L Ramani Shahina Zia (14DM190)

Shakti Mishra (14DM192)

Srikanth Thakkolam (14DM219)

Surabhi Kachhawah (14DM224)

Vivek Sethia (14DM250)

Yatin Gupta (14DM253)

Question 1

Explain and evaluate the future implication of company’s capital budgeting decision.

Sol. From the case study, we can calculate the cost of equity capital as under

Ke = Rf +β (Rm – Rf)

= 0.0853+0.928(0.05)

= 13.17%

Through this rate we will further find out the present value of the revenue generated through sales by the company.

Year

Sales

(Rs. in Cr.)

Present Value (Rs. in Cr.)

Discount Rate

2007

478.1

478.1

13.17

2008

524.4

461.173

2009

546.3

422.5

2010

851.0

578.8

2011

937.8

560.9

2012

1290.2

678.6

3180(approx.)

Now taking the average of this value we get Rs. 530 Cr. Considering this to be the consolidated revenue per year we can say that the total amount of both the acquisitions constituted 33% of the same, which comes out to be Rs. 174.9 Cr.

In the cash flow statement of the year 2007 it is mentioned that there has been an expense on acquisition which is the Dunlop Tyres International Ltd. the step taken by Apollo Tyres Ltd. for their expansion in the South African Market which is Rs. 26.4 Cr. So after deducting the amount we will obtain the value of amount spent in the second acquisition i.e. Vredestein B. V. (Netherlands).

Amount spent on second acquisition = Rs. 174.9 – 26.4 = Rs. 148.5 Cr.

Now calculating the future value of Rs. 148.5 Cr. as on year 2009 at 13.17%, we get the value

= Rs. 148.5 * (1.1317)2 = Rs. 190.2 Cr.

Rs. 190.2 Cr. is the amount that is spent on acquisition of Vredestein B. V. which is spread in the span of two year i.e. 2009 and 2010. Now from the cash flow statement is clear that there has been two expenses which are purchase of fixed assets and purchase of investments which sum up to be Rs. 52 Cr. After deducting this amount we get