Instructions for Case

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

*
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

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.

>Valuation framework

.0%

091

8 Growth, units (%) 12.0%
9 Volume, units

792

Inflation (%)

12 sales, sterling

000

.0%

000

100

400

Depreciation 10000

30000

23099


Projected
	1	9	8	3		19	4
Dollar/sterling			1.3	5
	United States
	Growth, units (%)			12
	Volume, units		15	6	1	7
	Inflation (%)		3.0
US$ price/unit		25	31
sales, dollars	438065
	sales, sterling	3	24	92
Rest of the world
	13	20		14
10	5.0%
11	price/unit , sterling		17	28
255662
var. cost of sales/unit	135	21
NWC			30
discount rate		18
Total sales, units	31883
16	Total revenues	580154
Var. cost sales	431091
	Depreciation		10000
R&D	18000
Distribution	1	33	13965
Administration		22		23
Total Costs	496156
EBIT		839
Tax		29
EBIAT	54599
26
27	Operating cash flow	64599
Increase NWC
Capital Expenditure	11500
FCF		23099
Terminal value
discount factor	1.00
32	PV, FCF
Value of firm (sterling)

&A
Page &P

EXHIBITS

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

55.7 87.3

112.4 119.0 Current Assets: Stocks 56.3 68.8 62.7 7

6.5 Debt

ors 26.3 2

9.6 33.8 42.5 Cash & short-term deposits

1.3

6.9 2

9.5 11.5 TOTAL

83.9 105.3 126.0 130.5 Creditors: Amount falling due within one year 51.3 8

1.1 128.8 127.5 Net Current Assets (

Liabilities

) 32.6 24.2 (

2.8

)

3.0
[PGDN] FOR MORE OF EXHIBIT 1… Total Assets

Less Current Liabilities

88.3 111.5 109.6 122.0 Creditors: Amounts falling due in more than one year (a) 1.2 17.6 43.9 58.0 NET 87.1 93.9 65.7 64.0 Capital and Reserves: Called up share capital 45.0 Other Reserves 10.3

2.8
Profit and loss account 55.4 16.2 BL Group funding balance (b)

87.1 93.9
NET £ 87.1 93.9 65.7 64.0
(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) Quarter ended — Years ended December 31, —

March 31,
1980

1981 1982 1983 1984
Turnover

– – – – –
Continuing activities 166.4 195.2 305

.6 472.6 14

3.3 Discontin. activities 8

3.6 48.3 4.3

— —
TOTAL

50.0 243.5 309.9

472.6

143

.3
Cost of sales (a) (273.7) (24

5.6

) (258.4) (369.7) (108.8) GROSS PROFIT/(LOSS) (23.7) (2.1) 51.5 102.9 34.5 Distribution costs (7.3) (7.8) (13.8) (13.3) (4.4) Administrative expenses (8.1) (11.2) (14.8) (22.0) (6.2) Research and dvpt. cost (5.2) (9.8) (12.8) (16.5) (5.7) OPERATING PROFIT/(LOSS) (44.3) (30.9) 10.1 51.1 18.2 Interest (3.0) (0.8) (0.5) (1.1) (0.2) PROFIT/(LOSS) ON ORDINARY ACT

ITIES BEF. TAX. (47.3) (31.7)

9.6 50.0

18.0 Tax. on ord. activities

1.3 —

(0.1)

(0.5) (0.5)
PROFIT/(LOSS ON ORDINARY ACTIVITIES AFT. TAX. (46.0)

(31.7) 9.5

49.5 17.5 Extraordinary items

(6.2)

(4.6)

(3.0) —

(14.2) PROFIT/(LOSS) FOR THE FINANCIAL PERIOD (52.2) (36.3)

6.5 49.5 3.3
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

Market

s; December 31 (in number of vehicles) 1980 1981 1982 1983
Model Range:

– – – –
Series

I saloons 13851 12,666 17,733 23,413 XJ-S sports cars 1526 1,108 3,131 4,886 Limousines

159

143

168

TOTAL

JAGUAR

15,469 13,933 21,007 28,467 MORE—> 1980 1981 1982 1983
Geographical Area:

– – – –
United States

2,518 1

6% 5,154 37% 9,971 47% 15,260 5

4% United Kingdom 6,135 40% 5,196

37%

6,415 3

1% 7,236 2

5% West

Germany 1,612 10% 479 3%

839 4%

1,164

4%
Rest of Europe 3,539 23% 1,229 9% 1,742 8% 1,845

6%
Australia 140

654

582

579 2% Canada

305 2%

375

280

563

2%
Rest of World 1,220

846

1,178

1,820

6%
TOTAL JAGUAR

15,469

100%

13,933 100% 21,007 100% 28,467 100%
EXHIBIT 5 Comparative Data on Selected

Manufacturer

s Daimler-

BMW

Benz Porsche

Jaguar

mill.

DM mill. DM mill.

£mill. – – – –
Year Ended 7/31/83 12/31/83

12/31/83 12/31/83
Revenues 11,943.0 40,004.8 2,133.6

472.6
Operating Profit 916.1 3,665.8 194.5

51.1
Profit after taxes 291.7 987.9 69.6

49.5
Depreciation charges 733.2 2,604.1 71.1

5.6
Interest expense 85.3 388.5

3.6 1.1
Total Assets

5,799.6 24,826.7 866.6 249.5 Equity 2,169.3 7,547.6 220.7

—
Debt
Long-term 652.7 7,534.0 15.7

43.9
Short term 207.1 1,100.9 34.1

128.8
[PGDN] FOR MORE OF EXHIBIT 5… Stock Price (6/29/84) DM 343.88 467.90 1003.00

—
Shares outst. (000) 1

5,000 42,313 700

—
Earnings/share DM 19.45 8.40 99.43

—
Dividends/share DM 10.00 10.50

— —
Manufact. volume (units) 407,507 483,359 48,288 28,041 Employees 50,158 184,877 5,883 8,606 Engineers 2,000

5,000

1,400 450 [PGDN] FOR

EXHIBIT 6

… EXHIBIT 6

1983 New Car Registrations for

U.S.

and Europe by Manufacturer
Daimler-Benz: Porsche: U.S.

73,692

U.S.

21,831 W. Germany 246,160

W. Germany

12,176 U.K. 13,506

U.K.

3,333 Other Europe 52,394

Other Europe

2,896 TOTAL

385,752

TOTAL

40,236 BMW: Jaguar: U.S.

59,242

U.S. 15,260
W. Germany

155,683

W. Germany 1,164
U.K.

25,178

U.K. 7,236
Other Europe

81,184

Other Europe 1,845
TOTAL

321,287

TOTAL

25,505 To view graphs, use the commands [/] [Graph] [

Name

] [Use] and select graph by name. [PGDN] FOR

EXHIBIT 7

… EXHIBIT 7

Quarterly Nominal

Spot

Exchange Rates,

1975

-1984 Quarter

$/£ DM/$ – – –
I-1975 R$2.418 2.319

DM
II

2.280 2.340 III 2.084 2.618 IV

2.022 2.622 I-

1976 1.943 2.560 II

1.764 2.578 III

1.727 2.489 IV

1.678 2.383 I-

1977 1.717 2.392 II

1.719 2.356 III

1.743 2.324 IV

1.904 2.110 I-

1978 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 I-

1979 2.062 1.868 II

2.178 1.837 III

2.204 1.741 IV

2.209 1.725 I-1980 2.154 1.957 II

2.359 1.763 III

2.384 1.814 IV

2.391

1.974
I-1981 2.237 2.111 II

1.923 2.396 III

1.801 2.323 IV

1.913

2.237
I-1982 1.784 2.413 II

1.733 2.468 III

1.693 2.531 IV

1.618 2.374 I-1983 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 I-1984

1.445

2.603 II

1.353 2.783 [PGDN] FOR

EXHIBIT 8

… EXHIBIT 8

Inflation Rates and Contemporary Financial Market Data INFLATION RATES U.S. U.K. Germany
– – –
1975

9.2% 2

4.1% 5.9% 1976

5.8% 16.6% 4.3% 1977

6.4% 15.7% 3.8% 1978

7.6% 8.4% 2.6% 1979

11.4% 13.4%

4.1%
1980

13.5% 17.9% 5.5% 1981

10.3% 11.9%

6.4%
1982

6.2% 8.6% 5.2% 1983

3.2% 4.5% 3.3% 1984Q1 2.7%

2.7%

1.8% 1984Q2 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 Forward JUNE 19, 1984:

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, Domestic

Domestic
END OF JUNE 1984: Gov’t Corporate

Domestic
Bonds

Bonds

Treasury Money (long-term) Bills

Market

– – – –

U.S. $ 13.75% 14.50% 10.29% 11.63% Germany DM 8.25% 8.00% 0.00% 6.10% U.K. £ 10.81% 12.69% 9.08% 9.44% Japan ¥ 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 2-291-531 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:

Balance Sheets
Exhibit 2:

Income Statements
Exhibit 3: Jaguar Sales by Models and Markets Exhibit 5: Comparative Data on Selected Manufacturers Exhibit 6: 1983 New Car Registrations for U.S. and Europe by

Manufacturer

Exhibit 7: Quarterly Nominal Spot Exchange Rates, 1975-1984 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 1-2-3. 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] to select the GOTO function Press [F3] to display a list of range NAMES Right arrow key twice to select EXHIBIT-03 Press [ENTER] 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