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Introduction to the Jaguar Case In 1984, British government wants to privatize Jaguar, but what is a proper value?

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.

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Introduction to the Jaguar Case In 1984, British government wants to privatize Jaguar, but what is a proper value?

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  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

  2. 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

  3. 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

  4. 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.

  5. 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.

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