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 write$-$up$.$ Be sure to be as clear and concise as

possible.

$1)(10)$

$$ Discuss about Jaguar$$s exchange rate exposures. $(5)$

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

exposures? $(4)$

$2)(40)$

$$ How much is Jaguar worth in sterling at the beginning of $1984?(10)$

$$ In order to focus on the issues related to risk management we provide a

spreadsheet that with a framework for the valuation and the projected free cash

flow for $1984($see Jaguar.xls and the assumptions used in the next page$).$ To

finish the valuation you should make your own assumptions for $1985$ and

beyond. In particular, you should determine what are reasonable forecasts for

the value of the $$/$ rate.$(20)$

$$ Furthermore, thoughts must be given to how these exchange rates will affect

the prices and quantity of Jaguar cars sold in the U$.$S$.(10)$

$3)(20)$ 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?$(5)$

$$ What is Jaguar$$s 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. $(5)$

$4)(10)$

$$ Discuss how Jaguar could manage this exposure using forward contr

acts.$(5)$

$$ What type of positions would they take and for how long?$(5)$

$5)(20)$

$$ Consider the exposure $($delta$)$ of Jaguar to the $$/$ rate for a U$.$S$.$ investor rather

than a U$.$K$.$investor $(10).$

$$ Is the exposure to the dollar$-$based owners the same as that of the pound$-$based

investors above? Why or why not? $(10)$

$3$

ASSUMPTIONS AND CASH FLOW STRUCTURE

Fixed Costs $-$ Capital expenditure is assumed to be $11\mathrm{.}5$ 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 $18\mathrm{.}0$ 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 $13\mathrm{.}3$ and

$22\mathrm{.}0$ 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 $28\mathrm{.}041,$ 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.