Introduction to the Jaguar Case

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Presentation transcript:

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.

£ 50 million / (0.18 - 0.05) = £ 385 million 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.