Professional Documents
Culture Documents
Tata Motors: Cost of Capital
Tata Motors: Cost of Capital
Case Background:
Tata Motors was founded in 1945 and is one of the leading automobile companies in
India. It manufactures a wide range of automotive vehicles, including 1 to 49 ton
truck, small, medium, and large buses, coaches to passenger and luxury cars.
The company is facing a tough competition from domestic and foreign players. It’s
market shared has drastically declined in the past years. Over 5 MNCs launched over
50 new products in last 4 years, while for TM the number stood at 3. Jaguar Land
Rover (JLR) has been the been the cash cow for the company. Despite making a huge
loss in the standalone income statement, TM managed to make an overall profit by the
virtue of JLR.
Long ago, TM conducted a study on the Weighed Average Cost of Capital (WACC).
The top management subsequently implemented a strategy to estimate the cost of
capital each year and decompose it into its components for historical estimates. Cost
of capital was used as an important benchmark for both corporate and divisional
performance. They also used WACC as a barometer for studying external market’s
perception of the economy.
Capital Asset Pricing Model (CAPM) was used to calculate Cost of equity and Before
tax Cost of Debt was computed using yield to maturity of the company’s publicly
traded long-term debt. Equity risk premium was estimated on long run average of the
return on BSE Sensex Index less return on long term government bonds and Equity
and Debt Costs were averaged according to the proportions each source represented of
the capital structure.
Debarshi Konar, the Business Analyst of Tata Motors while analyzing the WACC for
the past years found that cost of equity has been increasing relative to the cost of debt.
He has to now explain the reasons behind such varied figures in the WACC.
Critical Financial Problems:
3.