MACROECONOMICS
CASE : Jaguar plc, 1984
Kwon, Hyuk Joo
Kim, Min
Chang, Hae Yoon
Jeon, Joohwan
Question 1 How much is Jaguar worth in 1984
The firm value of Jaguar is GBP 510,977,000 in 1984 under the scenario (A), while the firm value is GBP 215,492,000 under the scenario (B).
Since there is no change in real exchange rate under the scenario (A), we just considered the change in nominal exchange rate due to the inflation difference between the U.S and the U.K. By using the nominal exchange rate, we converted the U.S sales value from USD to GBP. Then, with other assumptions about revenue and cost we could calculate the free cash flows of 1985-1989 and the terminal value. The firm value is the sum of present value (at 1984) of cash flows and the terminal value, GBP 510.977,000.
For the scenario (B), there are more things to consider due to the change in real exchange rate. Since the real value of the dollar dropped by 25% in 1985, the nominal exchange rate become USD 1.655/ GBP. We also assume Jaguar’s 10% increase in USD prices which is $28,194 in 1985. Price elasticity of demand was low so that 10% changes in price resulted in 2% growth of the volume. And we applied the same logic to further year’s cash flow and the terminal value. Then we discounted future cash flows and the terminal value to achieve GBP 215,492,000.
QUESTION 2: What is the company’s exposure to exchange rate?
Jaguar, as a U.K.-based exporter to U.S. market, is exposed to exchange rate risk as more than half of its sales occur in USD while its production cost occurs in GBP. For this reason, Jaguar’s firm value (NPV of future free cash flows) may change in response to the change in the interest rate. Following is the company’s exposure to 1% change in exchange rates.
Spot exchange rate Dollar appreciation
Dollar depreciation
E[USD/GBP]
1.35
1.3635
1.3365
Firm value
(NPV of future FCF)
215.492
197.712
233.630
% change in NPV
-8.25%
8.42%
% change NPV / % change S
8.251
Kwon, Hyuk Joo
Kim, Min
Chang, Hae Yoon
Jeon, Joohwan
Question 1 How much is Jaguar worth in 1984
The firm value of Jaguar is GBP 510,977,000 in 1984 under the scenario (A), while the firm value is GBP 215,492,000 under the scenario (B).
Since there is no change in real exchange rate under the scenario (A), we just considered the change in nominal exchange rate due to the inflation difference between the U.S and the U.K. By using the nominal exchange rate, we converted the U.S sales value from USD to GBP. Then, with other assumptions about revenue and cost we could calculate the free cash flows of 1985-1989 and the terminal value. The firm value is the sum of present value (at 1984) of cash flows and the terminal value, GBP 510.977,000.
For the scenario (B), there are more things to consider due to the change in real exchange rate. Since the real value of the dollar dropped by 25% in 1985, the nominal exchange rate become USD 1.655/ GBP. We also assume Jaguar’s 10% increase in USD prices which is $28,194 in 1985. Price elasticity of demand was low so that 10% changes in price resulted in 2% growth of the volume. And we applied the same logic to further year’s cash flow and the terminal value. Then we discounted future cash flows and the terminal value to achieve GBP 215,492,000.
QUESTION 2: What is the company’s exposure to exchange rate?
Jaguar, as a U.K.-based exporter to U.S. market, is exposed to exchange rate risk as more than half of its sales occur in USD while its production cost occurs in GBP. For this reason, Jaguar’s firm value (NPV of future free cash flows) may change in response to the change in the interest rate. Following is the company’s exposure to 1% change in exchange rates.
Spot exchange rate Dollar appreciation
Dollar depreciation
E[USD/GBP]
1.35
1.3635
1.3365
Firm value
(NPV of future FCF)
215.492
197.712
233.630
% change in NPV
-8.25%
8.42%
% change NPV / % change S
8.251