Jaguar Plc. 1989 Case Solution
To identify the future value of the company, there is a need to discount the future cash flows of the company at a suitable rate, therefore, with the help of capital asset pricing model cost of equity is identified. After identifying the cost of equity with the aid of capital asset pricing model and by taking certain assumptions such as risk-free rate, market premium, and beta, the value of debt, the cost of debt and value of equity is identified. By putting all this value into the formula of weighted average cost of capital, a suitable discount factor is determined which is 13.8%.
Analysis of FCF
It is expected that in order to determine the total worth of the company, free cash flow method is used. By taking EBIT and making certain adjustments such as adding back depreciation, deducting capital expenditure and adjusting working capital changes free cash flows are identified for projected years. By discounting these free cash flows on WACC of 13.8% net present value of the company is identified. In order to determine the cash flows for the foreseeable future, terminal value is also defined by assuming 4% terminal growth.
Â The purpose for the valuation of Jaguar was to know the projected value of the company for the acquisition and to relate with the current forward rates in order to analyze the true worth excluding the risk associated with the local currency.
However with the individual projected cash flows, the company would be able to determine the expected per-share value for the shareholders in both the existing as well as the post-acquisition process. So it is concluded that the Jaguar might acquire by the Ford due to the high value of the company and, therefore, manage to handle the cash flows by the selected forward rates associated with it.
Manageable currency for Jaguar
According to the current scenario, it would be realized that excluding the rate of U.S, the German forward rate could be considered as the best for Jaguar to manage because the fluctuated rates are quite high as compared to the Japanese Yen.
The benefit could be to hedge the currency over the period of 12 months, which would allow handling all the negative fluctuations due to inflation in the economy and able to manage the expected loss associated with the change. However, the most fluctuated results are given in the currency of U.S, but the company wanted to hedge with the exchange so German money could allow reducing the risk of inflation by lock the forward value in the given year.
Exposure of Jaguar to U.S dollar
Before hedging to the foreign currency, there has been a lot of risk for the Jaguar to manage the U.S currency locally because the average fluctuation rates in the forward agreement are very high as compared to the other currency rates.
Therefore, if the company would hold the local currency, then there could be a potential threat for higher inflation rate which might decrease the value of the coin and to reduces the size of profit margins for Jaguar. It would also hurt the hedging agreement if the local currency would raise in the next year and not providing benefits for the Jaguar to manage the entire operations and, therefore, would subject to loss due to overvaluation.
There are some other risk associated with it, for example if the company will hedge the amount and the related currency will increase in the future then the company has no control to manage the loss due to fixed the amount of hedge and it will not able to control the entire results that can impact the overall performance………………
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