Case Analysis: Valuing Jaguar plc and Managing Exchange Rate Exposures

Jaguar's exchange rate exposures

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 contracts.(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”)