Hello,

I need question 1 and 3 answered.

Question 1:

Discuss about Jaguars exchange rate exposures. (5)

To which currencies is Jaguar exposed? (1) What are the sources of these exposures? (4)

Question 3:

You are a security analyst responsible for following Jaguar's stock after it floats. (Assume the company had 100 million shares outstanding.)

>What is your estimate of Jaguar's stock price given a 10% drop in the real value of the dollar?(5)

>What is Jaguars market value exposure (and delta) with respect to the real dollar/sterling exchange rate? (5)What is Jaguar's free cash flow exposure (and delta) for the years 1985 to 1989 with respect to the real dollar/sterling exchange rate? (5)

> Discuss the economic reasons for the size of this exposure

The Florida International University College of Business Administration FIN4604: International Financial Management Fall 2015 Dr Q. Kang General Instructions on Project The project analysis is due December 1, Tuesday, 11:59pm. Each group needs to submit only one written copy of the project analysis using the Blackboard's Assignment Dropbox. Write down each group member's name on the front page of the report. I will grade each group's project analysis according to the Rubrics posted in the Blackboard. Each member of the group will receive the same grade. Groups will be formed by the professor within one week after this instruction is distributed. Each group typically consists of four students. Please check the Grade Center at the Blackboard to find out your group members. Note that you are responsible for setting up a scheme to coordinate each group member's efforts on this project. Free-riders are NOT welcome. The group can vote with a majority to kick the free-rider out of his/her group - in that case, the one who is kicked out will receive zero grade on the project. You may find it useful to take a look at the slides: \"jaguar_introduction.ppt\Introduction to the Jaguar Case In 1984, British government wants to privatize Jaguar, but what is a proper value? Description of luxury car market and Jaguar's recent results. The problem that a high dollar presents. A stab at valuation -- Price/earnings for German competitors. Two exchange rate scenarios. Review of valuation Calculation of delta A General Valuation Framework Steps involved in the valuation: - Step 1: Estimate the free cash flows of an unlevered firm or project - Step 2: Discount the unlevered cash flow with the WACC This is the value VL of the levered firm - Step 3: Subtract the value of debt to get the value of equity VE =VL - D 9 Estimating Free Cash Flows Estimating the free cash flows of an unlevered firm or project: earnings before interest and taxes (EBIT) - taxes = earnings before interest and after taxes (i.e., EBIAT= EBIT( 1 - C)) + depreciation = operating cash flows - capital expenditures - investment in working capital =total free cash flow to unlevered firm 10 Applying the valuation framework to the Jaguar case To find a value for Jaguar, must start with free cash flows = profits after tax + depreciation - increase in working capital - capital expenditure Then take present value of these free cash flows. Finally, subtract long term debt. Notes on Jaguar Example: If Jaguar has 50 million in free cash flows every year no debt and if its discount rate is 18 %, then its value is 50 million / 0.18 = 278 million If 50 million is the free cash flow this year and if it grows at 5 % per year, then its value is 50 million / (0.18 - 0.05) = 385 million What if we try to project actual cash flows for Jaguar for the next five years? What do we do with cash flows beyond this horizon? Answer: Form a terminal value of Jaguar based on some assumption about cash flows thereafter. 1983 Dollar/sterling United States Growth, units (%) Volume, units 15260 Inflation (%) US$ price/unit sales, dollars sales, sterling Rest of the world Growth, units (%) Volume, units Projected 1984 1.350 12.0% 17091 3.0% 25631 438065 324492 13207 Inflation (%) price/unit , sterling sales, sterling 12.0% 14792 5.0% 17284 255662 var. cost of sales/unit NWC discount rate 13521 30000 18.0% Total sales, units Total revenues 31883 580154 Var. cost sales Depreciation R&D Distribution Administration 431091 10000 18000 13965 23100 Total Costs EBIT Tax EBIAT Depreciation Operating cash flow Increase NWC Capital Expenditure FCF Terminal value discount factor PV, FCF Value of firm (sterling) 13300 22000 496156 83999 29400 54599 10000 64599 30000 11500 23099 1.00 23099 EXHIBIT 1 Balance Sheets (in millions of pounds) December 31, March 31, 1981 1982 1983 1984 Fixed Assets: Tangible Assets 55.7 87.3 112.0 118.6 Investments in related companies 0.4 0.4 TOTAL FIXED ASSETS #VALUE! #VALUE! 112.4 119.0 Current Assets: Stocks Debtors Cash & shortterm deposits TOTAL Creditors: Amount falling due within one year 56.3 26.3 1.3 83.9 Total Assets Less Current Liabilities 62.7 33.8 29.5 126.0 76.5 42.5 11.5 130.5 51.3 Net Current Assets (Liabilities) 68.8 29.6 6.9 105.3 81.1 128.8 127.5 32.6 24.2 (2.8) [PGDN] FOR MORE OF EXHIBIT 1... 3.0 #VALUE! Creditors: Amounts falling due in more than one year (a) NET Capital and Reserves: Called up share capital Other Reserves Profit and loss account BL Group funding balance (b) NET #VALUE! 109.6 122.0 1.2 #VALUE! 17.6 #VALUE! 43.9 65.7 58.0 64.0 10.3 55.4 45.0 2.8 16.2 65.7 64.0 87.1 87.1 93.9 93.9 (a) These obligations consisted primarily of capitalized leasing obligations and warranty expense accruals. (b) The BL Group funding balance was made up of certain loans from BL Group which represented the capital and reserves of the Jaguar business before the Jaguar Group acquired that business with effect from January 1, 1983. [PGDN] FOR EXHIBIT 2... EXHIBIT 2 Income Statements (in millions of Pounds) Turnover Continuing activities Discontin. activities TOTAL Cost of sales (a) GROSS PROFIT/(LOSS) Years ended December 31, 1980 1981 1982 1983 166.4 195.2 305.6 472.6 83.6 48.3 4.3 250.0 243.5 309.9 #VALUE! (273.7) (245.6) (258.4) (369.7) (23.7) (2.1) 51.5 #VALUE! Distribution costs Administrative expenses Research and dvpt. cost OPERATING PROFIT/(LOSS) Quarter ended March 31, 1984 143.3 #VALUE! (108.8) #VALUE! (7.3) (8.1) (5.2) (44.3) (7.8) (11.2) (9.8) (30.9) (13.8) (14.8) (12.8) 10.1 (13.3) (22.0) (16.5) #VALUE! (4.4) (6.2) (5.7) #VALUE! Interest (3.0) PROFIT/(LOSS) ON ORDINARY ACTIVITIES BEF. TAX. (47.3) (0.8) (0.5) (1.1) (0.2) (31.7) 9.6 #VALUE! #VALUE! 1.3 (0.1) (0.5) (0.5) (46.0) (6.2) #VALUE! (4.6) 9.5 (3.0) #VALUE! #VALUE! (14.2) (52.2) #VALUE! 6.5 #VALUE! #VALUE! Tax. on ord. activities PROFIT/(LOSS ON ORDINARY ACTIVITIES AFT. TAX. Extraordinary items PROFIT/(LOSS) FOR THE FINANCIAL PERIOD Rates of exchange Realized profits on exchange, together with losses on exchange, whether realized or unrealized, which arise on settlement of overseas liabilities are included in trading results. Profit and loss account items of foreign subsidiaries are translated into sterling at the average rate of exchange for each monthly accounting period. Assets and liabilities, including outstanding forward exchange contracts, are translated into sterling at the rates of exchange ruling at the end of the financial period. (a) Includes depreciation charges of 5.6 million in 1980, 7.3 million in 1981, 7.2 million in 1982, 8.6 million in 1983 and 2.5 million for the first quarter of 1984. [PGDN] FOR EXHIBIT 3... EXHIBIT 3 Jaguar Sales by Models and Markets; December 31 (in number of vehicles) 1980 1981 1982 1983 Model Range: Series III saloons 13851 12,666 17,733 23,413 XJS sports cars 1526 1,108 3,131 4,886 Limousines 92 159 143 168 TOTAL JAGUAR 15,469 13,933 21,007 28,467 Geographical Area: United States United Kingdom West Germany Rest of Europe Australia Canada Rest of World TOTAL JAGUAR EXHIBIT 5 1980 2,518 6,135 1,612 3,539 140 305 1,220 15,469 16% 40% 10% 23% 1% 2% 8% 100% 1981 5,154 5,196 479 1,229 654 375 846 13,933 Comparative Data on Selected Manufacturers 37% 37% 3% 9% 5% 3% 6% 100% MORE> 1982 9,971 6,415 839 1,742 582 280 1,178 21,007 47% 31% 4% 8% 3% 1% 6% 100% 1983 15,260 7,236 1,164 1,845 579 563 1,820 28,467 54% 25% 4% 6% 2% 2% 6% 100% Daimler BMW Benz Porsche Jaguar DM mill. DM mill. DM mill. mill. 7/31/83 12/31/83 12/31/83 12/31/83 Year Ended Revenues Operating Profit Profit after taxes Depreciation charges Interest expense Total Assets Equity Debt Longterm Short term ### ### 2,133.6 916.1 3,665.8 194.5 291.7 987.9 69.6 733.2 2,604.1 71.1 85.3 388.5 3.6 5,799.6 ### 2,169.3 7,547.6 866.6 220.7 472.6 51.1 49.5 5.6 1.1 249.5 652.7 7,534.0 15.7 43.9 207.1 1,100.9 34.1 128.8 [PGDN] FOR MORE OF EXHIBIT 5... Stock Price (6/29/84) DM Shares outst. (000) Earnings/share DM Dividends/share DM Manufact. volume (units) Employees Engineers 343.88 15,000 19.45 10.00 467.90 1003.00 42,313 700 8.40 99.43 10.50 407,507 483,359 50,158 184,877 2,000 5,000 48,288 5,883 1,400 28,041 8,606 450 [PGDN] FOR EXHIBIT 6... EXHIBIT 6 1983 New Car Registrations for U.S. and Europe by Manufacturer DaimlerBenz: U.S. W. Germany U.K. Other Europe TOTAL 73,692 246,160 13,506 52,394 385,752 Porsche: U.S. W. Germany U.K. Other Europe TOTAL 21,831 12,176 3,333 2,896 40,236 BMW: U.S. W. Germany U.K. Other Europe TOTAL 59,242 155,683 25,178 81,184 321,287 Jaguar: U.S. W. Germany U.K. Other Europe TOTAL 15,260 1,164 7,236 1,845 25,505 To view graphs, use the commands and select graph by name. EXHIBIT 7 [/] [Graph] [Name] [Use] [PGDN] FOR EXHIBIT 7... Quarterly Nominal Spot Exchange Rates, 19751984 Quarter $/ DM/$ I1975 R$2.418 2.319 DM II 2.280 2.340 III 2.084 2.618 IV 2.022 2.622 I1976 1.943 2.560 II 1.764 2.578 III 1.727 2.489 IV 1.678 2.383 I1977 1.717 2.392 II 1.719 2.356 III 1.743 2.324 IV 1.904 2.110 I1978 1.863 1.998 II 1.860 2.072 III 1.974 1.940 [PGDN] FOR MORE OF EXHIBIT 7... IV 2.043 1.820 I1979 2.062 1.868 II 2.178 1.837 III 2.204 1.741 IV 2.209 1.725 I1980 2.154 1.957 II 2.359 1.763 III 2.384 1.814 IV 2.391 1.974 I1981 2.237 2.111 II 1.923 2.396 III 1.801 2.323 IV 1.913 2.237 I1982 1.784 2.413 II 1.733 2.468 III 1.693 2.531 IV 1.618 2.374 I1983 1.483 2.429 II 1.528 2.544 III 1.495 2.631 [PGDN] FOR MORE OF EXHIBIT 7... IV 1.445 2.728 I1984 1.445 2.603 II 1.353 2.783 [PGDN] FOR EXHIBIT 8... EXHIBIT 8 Inflation Rates and Contemporary Financial Market Data INFLATION RATES 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984Q1 1984Q2 U.S. U.K. Germany 9.2% 24.1% 5.9% 5.8% 16.6% 4.3% 6.4% 15.7% 3.8% 7.6% 8.4% 2.6% 11.4% 13.4% 4.1% 13.5% 17.9% 5.5% 10.3% 11.9% 6.4% 6.2% 8.6% 5.2% 3.2% 4.5% 3.3% 2.7% 2.7% 1.8% 1.1% 2.1% 0.5% Note: Rates for 1975 through 1983 are annualized. 1984 rates are quarterly. [PGDN] FOR MORE OF EXHIBIT 8... STERLING EXCHANGE RATES JUNE 19, 1984: Forward Spot 1 month 3 month 6 month 12 month U.S. Dollar $ 1.3568 1.3600 1.3659 1.3752 1.3940 German Mark DM 3.7725 3.7620 3.7394 3.7047 3.6438 Japanese Yen 322.0 321.2 319.4 316.5 310.2 INTEREST RATES, END OF JUNE 1984: U.S. $ Germany DM U.K. Japan Domestic Domestic Gov't Corporate Domestic Bonds Bonds Treasury Money (longterm) Bills Market 13.75% 14.50% 10.29% 11.63% 8.25% 8.00% #N/A 6.10% 10.81% 12.69% 9.08% 9.44% 7.46% 7.13% 4.91% 6.40% Note: Domestic corporate bonds are of various terms not necessarily identical to corresponding domestic government issues. JAGUAR PLC, 1984 Harvard Business School Case Software 2291531 Copyright (c) 1990 by the President and Fellows of Harvard College. Developed in conjunction with MicroMentor, Inc., Cambridge, MA. This case was prepared as a basis for class discussion rather than to illustrate either effective or ineffective handling of an administrative situation. [PGDN] FOR LIST OF EXHIBITS... WORKSHEET NAVIGATION This worksheet contains the data from the following exhibits: Exhibit 1: Exhibit 2: Exhibit 3: Exhibit 5: Exhibit 6: Balance Sheets Income Statements Jaguar Sales by Models and Markets Comparative Data on Selected Manufacturers 1983 New Car Registrations for U.S. and Europe by Manufacturer Exhibit 7: Quarterly Nominal Spot Exchange Rates, 19751984 Exhibit 8: Inflation Rates & Contemporary Financial Market Data The data for the first exhibit are located in the [HOME] position. To view each succeeding exhibit, press the [PGDN] key. For a description of a more efficient means of navigation, press the [PGDN] key now. [PGDN] FOR MORE... OPTIONAL NAVIGATIONAL TECHNIQUE Each exhibit in this worksheet has been named using the commands in Lotus 123. This allows you to easily move from one section of the worksheet to another. To go to a specific exhibit, press function key [F5], then [F3], highlight the name of the exhibit you wish to see, and press [ENTER]. For example, to go to Exhibit 3: Press [F5] Press [F3] Right arrow key twice Press [ENTER] to select the GOTO function to display a list of range NAMES to select EXHIBIT03 to complete the process Hit [HOME] to go to exhibits... REVISION HISTORY Date Name Explanation of Change 10/18/90 C. Lutter MicroMentor, Inc., Cambridge, MA. Created for Prof. Carl Kester IMF, 2nd year, Spring 1991 BMW Other Europe 25% U.S. 18% U.K. 8% W. Germany 48% Porsche Other Europe 7% U.K. 8% W. Germany 30% U.S. 54% Jaguar Other Europe 7% U.K. 28% U.S. 60% W. Germany 5% Daimler-Benz Other Europe U.S. 14% 19% U.K. 4% W. Germany 64% BMW Other Europe 25% U.S. 18% U.K. 8% W. Germany 48%