1. 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

9. 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

10. 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

11. 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.

12. £ 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 / ( ) = £ 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.