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    Assignment B: Made By:-Virender Singh Sahu

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    Virender Singh Sahu
    1) Apollo Industries is considering investing in new strategies that would grow sales by 12% annually for 4 years. This would increase profits but other financial metrics would remain unchanged. 2) Three investment options were considered: a loan, lease, or hire purchase. The loan would have the lowest net present value of cash outflows at $15.8 million over 6 years. 3) For the investment to be worthwhile, the company would need to forgo its annual dividend of $38 million for 2 years. However, the increased earnings per share would raise the stock price and dividends, benefiting shareholders.

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    Assignment B: Made By:-Virender Singh Sahu

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    1) Apollo Industries is considering investing in new strategies that would grow sales by 12% annually for 4 years. This would increase profits but other financial metrics would remain unchanged. 2) Three investment options were considered: a loan, lease, or hire purchase. The loan would have the lowest net present value of cash outflows at $15.8 million over 6 years. 3) For the investment to be worthwhile, the company would need to forgo its annual dividend of $38 million for 2 years. However, the increased earnings per share would raise the stock price and dividends, benefiting shareholders.

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    1) Apollo Industries is considering investing in new strategies that would grow sales by 12% annually for 4 years. This would increase profits but other financial metrics would remain unchanged. 2) Three investment options were considered: a loan, lease, or hire purchase. The loan would have the lowest net present value of cash outflows at $15.8 million over 6 years. 3) For the investment to be worthwhile, the company would need to forgo its annual dividend of $38 million for 2 years. However, the increased earnings per share would raise the stock price and dividends, benefiting shareholders.

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    16 views11 pages

    Assignment B: Made By:-Virender Singh Sahu

    Uploaded by

    Virender Singh Sahu
    1) Apollo Industries is considering investing in new strategies that would grow sales by 12% annually for 4 years. This would increase profits but other financial metrics would remain unchanged. 2) Three investment options were considered: a loan, lease, or hire purchase. The loan would have the lowest net present value of cash outflows at $15.8 million over 6 years. 3) For the investment to be worthwhile, the company would need to forgo its annual dividend of $38 million for 2 years. However, the increased earnings per share would raise the stock price and dividends, benefiting shareholders.

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    Assignment B

    Made By:-
    Virender Singh Sahu
    As given in the case study if the Apollo Industries maintain the status quo,
    The sales will remain constant at 2000. The gross margin and selling, general, and
    administrative expenses will also remain same, i.e. 20% and 8% respectively.
    The asset turnover ratios will remain constant. The discount rate or cost of
    capital will be 15%.

    But if the company adopts the new strategy


    Sales will grow at a rate of 12% per year for 4 years.
    The margins, turnover ratios, capital structure, and the discount rate will
    remain unchanged.
    All these financial parameters would remain same as earlier as a certain percentage of
    the sales as given in the first case. It means that the company would grow at 12%
    whereas the cost of capital is 15%.
    As mentioned in the case that sales will grow at a rate of 12% for 4 years. But sales is
    not necessarily the only parameter which a company should look for while making an
    investment.
    Considering that sales would not effect the other parameters.

    I would suggest that Apollo Industries Ltd. should go for Investments.


    1. Loan
    Annual Rental Installments: Rs. 30 Million/3.6 = Rs. 8.32 Million, (PVIFA for 5 years at 12%).

    Loan Interest/Yea Principal Interest Depreciation Net Cash PVIF at 12(1-


    Year End Installment r Repayed Shield Depreciation Shield Outflow .333)= 8% Total PV
    (5 Equal F=0.12*O/S G=Interes I=Depreciati
    Installment) Loan ($ Mn) 30 t*0.333 on*0.333 J= F-G-I K J*K
    1 3.6 0 1.1988 12 3.996 -5.1948 0.926 -4.810385
    2 8.32 3.6 4.72 1.1988 7.2 2.3976 4.7236 0.857 4.0481252
    3 8.32 3.034 5.286 1.010322 4.32 1.43856 5.871118 0.794 4.6616677
    4 8.32 2.4 5.92 0.7992 2.59 0.86247 6.65833 0.735 4.8938726
    5 8.32 1.69 6.63 0.56277 1.56 0.51948 7.23775 0.681 4.9289078
    6 8.32 0.9 7.42 0.2997 0.932 0.310356 7.709944 0.63 4.8572647
    18.58
    Net Cash Outflow: Rs. 18.58 Million
    Less: PV of Salvage Value, (Rs. 6 Million*0.463)
    Rs. 2.778 Million= PV of Rs. 15.8 Million of Cash Outflow for 6 years.
    2.Lease

    Year End Lease rent after taxes [R(1-T)] PVIFA at 8% for 5years Total PV

          D*E

    1-5 yr 35(1-0.333)= 23.345 3.993 93.14655

    The primary lease period of 5 years would have the PV of cash


    outflow of Rs. 93.14 Million. However, the next 5 years would
    have a PV of 2.5(1-0.333)*3.993*0.681= Rs. 4.55 Million. That
    means for a 10 year period, the PV of total cash outflow would be
    Rs. 97.69 Million.
    3.Hire Purchase

    Interest= 30,000,000*3*8/100= Rs. 72, 00,000


    Installment= (30,000,000+72, 00,000)/3= 12,400,000
    As per sum of years digit method, sum of years= 1+2+3= 6. Thus, the
    amount of interest each year will be,

    Year 1: 72, 00,000*3/6= 36, 00,000


    Year 2: 72, 00,000*2/6= 24, 00,000
    Year 3: 72, 00,000*1/6= 12, 00,000
    Year Interest/ Interest Depreciation Net Cash PVIF at 12(1-
    End Principal Installment Year Shield Depreciation Shield Outflow .333)= 8% Total PV

    G=Intere I=Depreciati
    E st*0.333 on*0.333 E-G-I J*K
    0 30,000,000
    1 12,400,000 3,600,000 1198800 12,000,000 3996000 7,205,200 0.926 6672015.2
    2 12,400,000 2,400,000 799200 7,200,000 2397600 9,203,200 0.857 7887142.4
    3 12,400,000 1,200,000 399600 4,320,000 1438560 10,561,840 0.794 8386100.96
    Net Outflow 22945258.6
    In case of HP, the PV of cash outflows is Rs. 22.9
    Million for a period of 3 years.
    Considering the fact that all the three cases (loan, lease
    and HP) have different time horizon under consideration,
    it is difficult to compare the three alternatives from
    financing point of view. However, loan option would
    clearly costs less compared to other options on a per year
    basis.
    Company has been paying a dividend of Rs. 3.8/share and has 10 Million shares
    outstanding. That means a dividend of Rs. 38 Million every year. The company
    would need to forgo this dividend to finance the Capital Expenditure of Rs. 19
    million per year for the next two years.

    Current market price of the share is, Rs. 34.20.

    P/E ratio= share price/EPS= 34.20/3.8= 9

    After the investment, the company would earn Rs. 13.3 million more every year,
    which means the total earnings per share after the Capital Expenditure will be,
    (Rs. 38 Million + Rs. 13.3 Million)/10= Rs.5.13 per share.

    The new share price could be, 9*5.13= Rs. 46.17

    This means, looking at the future cash flows we can say that, the company’s share
    price should increase to Rs. 46.17 from Rs. 34.2.
    Ans. B

    An investor who has 1000 shares of United Engineering Co.


    receives an annual dividend of Rs. 3.8*1000= Rs. 3800 at the
    moment.
     After the investment outlay, the EPS would grow to Rs. 5.13
    per share. This, means that the dividend income of this
    investor would grow to Rs. 5.13*1000= Rs. 5130.
     This means an increase of (5130-3800)/3800= 35%, the
    investor would be in a more than comfortable situation with
    this decision.
    Ans. C
    After going through the facts of this case we can certainly say that a low payout ratio
    could help boost up the earnings in the long run if there are opportunities to invest the
    retained earnings. In this case, we have assumed that the company distributes all its
    income as dividend and that an investor is indifferent towards the dividend policy.

    However, in reality investor’s preference is different depending upon the


    investment objective and tax bracket of the investor. An institutional investor might
    have a long term view and might prefer low dividend payout ratio. An individual
    investor in the highest tax bracket might prefer capital gains instead f dividend
    income which may be otherwise for a senior citizen who might prefer a constant
    dividend.

    Thus, in practice dividend policy is dependent on a lot of factors, not to


    forget the market factors like interest rate, liquidity and such other factors.

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