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Assignment of Jaguar plc, 1989.

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The questions are discrete and answerable in their own right. Each one should be answered separately. They are not a guide to an overall case answer. Please state your assumptions. 1) What is the value that can be created by a combination of Jaguar with either Ford or GM? What are the sources of such value? (You do not need numbers, just a discussion of potential synergies). 2) How much is Jaguar worth (price per share) and to which exchange rates is Jaguar exposed? (You can use the enclosed excel spreadsheet that has been constructed for you. This means that you do not have to pay att...

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Question Preview:

The questions are discrete and answerable in their own right. Each one should be answered separately. They are not a guide to an overall case answer. Please state your assumptions. 1) What is the value that can be created by a combination of Jaguar with either Ford or GM? What are the sources of such value? (You do not need numbers, just a discussion of potential synergies). 2) How much is Jaguar worth (price per share) and to which exchange rates is Jaguar exposed? (You can use the enclosed excel spreadsheet that has been constructed for you. This means that you do not have to pay attention to the Jaguar plc 1989 PDF Exhibit 6. Just use the enclosed spreadsheet and interpret the entries to see where the exposure comes from. In other words, please look at Jaguar's net worth as per the spreadsheet and interpret how it has been constructed, as opposed to changing the parameters in the spreadsheet). 3) Can you classify the exchange rate exposure into economic, transaction, and translation exposure? 4) Now, please consider alternative currency scenarios. Assume that the interest rates change and therefore the exchange rates vary ($, Y, DM and BP). Analyze the cases for different currencies separately: What would happen in the case the $ interest rate increases by 25% and the other rates stay fixed. Then, consider the case the DM interest rate increases by 25% and the other stay fixed. Finally, consider the case the Y interest rate increases by 25% and the other stay fixed. They, still considering one change at the time, consider what would happen in the case they drop by 10%? Assume also that prices and inflation do not change. a) Hint1: DCFs can be based on Exhibit 7. b) Hint2: Risk Premium is 7%. c) You can use the spot exchange rates on Exhibit 9. 5) What is the currency Jaguar should manage more? 6) How would you hedge? (Please provide an overall hedging plan, considering both financial and economic hedging alternatives. You do not have to go into numbers). 7) Assume that Ford acquires Jaguar. From the perspective of the US-based Ford shareholder, should Ford hedge Jaguar’s exposure?

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Jaguar is worth at sterling 4.24 per share and it is exposed with Dollar and DM as it sells in dollar in US market and DM in other European market. In order to find out its net worth all the revenues from UK and other European market is converted into sterling so as to find EBIT and hence FCFF to do the valuations. The interest rate moves is used to predict the future exchange rate which is then used to convert other currency revenues into sterling. The cost exposure is already in sterling as Jaguar has its plant in UK. So revenue is subtracted with cost to get the profit which is then added to get FCFF. Finally, PV at its cost of capital is found to get the firm value which is then subtracted with the debt to get equity value. Finally, it is divided with total no. of common share to get the net worth per share of Jaguar. Therefore, we arrive at the net worth of the shares of Jaguar. The net worth is adjusted wherever possible for the exchange rate differentials and other differentials as well.

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