Jaguar Case Study Solution

Merrill Lynch IB Institute August 2006 International Finance Sessions Professor Gordon Bodnar

Instructions for HBS Case: Jaguar plc 1984

NOTE: A spreadsheet template is on the website. You may also find data from previous problems sets useful. Use assumptions in this instruction sheet if they differ from those given in the case

In July 1984, the British government was preparing to privatize Jaguar plc. Having a significant portion of its sales in the U.S. and all of its production in Britain, Jaguar’s cash flows appeared sensitive to exchange rate movements. In mid 1984 the dollar was rather strong against sterling with respect to PPP and many people believe that the dollar must weaken over the medium term, despite the fact that U.S. inflation was expected to be lower than U.K. inflation over the near future. Others argued that the U.S. need for foreign capital would keep U.S. real interest rates high and thus lead to a continued strong dollar. Your job is amid all this uncertainty to determine a value that should be placed on Jaguar and to determine the exchange rate sensitivity of the investment. Q1: a. Generate forecasts of exchange rate using i) IRP based upon LT interest rates, ii) Relative PPP based upon expected inflation, and iii) linear reversion to an Absolute PPP level by 1989. b. For each set of XR forecasts, determine an estimate for how much Jaguar is worth in GBP as of the beginning of 1984 based upon the PV of its future expected cash flows. To determine how much Jaguar is worth, consider the company’s 1983 cash flows as presented in the case. If these flows are projected into the future then a value for Jaguar can be determined. To do this you must estimate future expected free cash flow (FCF) and discount them back to the present to obtain a present value (beginning of 1984) that will represents the value of the firm at that time. To do this, use the sample spreadsheet on the webpage and construct estimates of these expected free cash flows...