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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. The Florida International University College of Business Administration FIN4604: International Financial Management Srping 2016Dr Q. Kang General Instructions on Project Instructions for Case \"Jaguar plc, 1984\"** In July 1984, the British Government decided to privatize Jaguar plc. Jaguar sold over 50 % of its cars in the United States, but its production was confined to Britain, so it was subject to considerable exchange rate exposure. Your task is to take into account the exposure in pricing the shares of Jaguar and value how much the firm is worth under several exchange rate scenarios. Below is a list of questions you must address in your case analysis. For each answer, be sure to attach spreadsheets showing how you obtained the answer and describe any relevant calculations in your writeup. Be sure to be as clear and concise as possible. 1) Discuss about Jaguar's exchange rate exposures. To which currencies is Jaguar exposed? (1'') What are the sources of these exposures? (4\") ASSUMPTIONS AND CASH FLOW STRUCTURE Fixed Costs - Capital expenditure is assumed to be 11.5 million in 1984 and rises by 15% per year. Depreciation for 1984 is assumed to be 10 million (approximately 10% of fixed assets at beginning of 1984) and continues at 10% of the running balance of fixed assets plus capital expenditures each year. R&D is 18.0 million in 1984 and rises at the growth rate of total sales (in ). Distribution and administrative expenses (both assumed to be fixed costs) rise at the inflation rate from their 1983 figures of 13.3 and 22.0 million respectively. Variable Costs - All of the \"costs of sales\" in the income statement, net of depreciation, is (arbitrarily) assumed to be variable costs. Variable costs/unit rise at the inflation rate. Note that the 1983 volume used to determine unit costs should be production volume of 28.041, not sales volume. Net Working Capital - NWC in 1983 is unrealistically low for a stand-alone company. Assume that the balance in the NWC account is topped up to 30 million in 1984 and then grows at the growth rate of total revenues thereafter (the net addition each year from cash flow is the current balance times the % change in total sales). Other assumptions - Assume a tax rate of 35%. We used a growth rate of 12% over unit sales in 1983 in estimating the 1984 sales figures. The appropriate sterling discount rate is 18%, based upon average levels of inflation over the past few years. Finally you may treat sales to the \"rest of the world\" as denominated in so as to eliminate the need to directly model other non-$ currencies. Pound inflation is forecast to continue at around 5% into the foreseeable future. U.S. inflation is anticipated to average 3% per annum into the future. Indicate explicitly what your assumptions are about Jaguar unit sales growth for the future. SOME USEFUL TIPS: . 1) Exchange Rate Exposure: Transaction exposures and Economic exposure. . 2) \"Worth\" means Value of Asset. Procedures of calculating Value of Asset can be found in the PPT. . 3) The value in spreadsheet is \"in thousand\". For the data of 1983 . 4) Dollar/sterling of 1983 is available in Exhibits 7. ( Use the fourth quarter exchange rate of 1983) . 5) \"$ price/unit\" is assumed to rise at the inflation rate. . 6) NWC is available in Exhibit 1. . 7) R&D is available in Exhibit 2. . 8) Depreciation is available in Exhibit 2, notes (a). . 9) \"Total sales, units\" can be found in Exhibits 3. . 10) \"Var. cost sales\" is available in Exhibit 2. Note: cost of sales=369.7-8.6=361.1 11) Inflation rate of US and UK in 1983 is available in Exhibit 8. 12) EBIT is available in Exhibit 2.13) Tax rate is 35%.14) Increase NWC is the difference between 1983 NWC and 1982 NWC.15) Capital Expenditure is the difference between Fixed Assets of different years. 16) Discount factor is 1/ (1+18%).17) Value of firm=PV FCF-long term debt ( long term debt is available in Exhibit) 18) Terminal Valuet = CFt+1/(k-g) where K=18%, and g=12%. 1) 2) For the estimate from 1985 to 1989 Use PPP to estimate the exchange rate. For example: S1985=(1+$)/ (1+sterling)* S1984 Assume long term debt and liabilities have not changed. 4