Unit Sales in United States

Jaguar Plc sold 54% of cars in United States in 1983. Company’s production is mainly confined to United Kingdom. In 1984, the British Government decided to privatize the Jaguar. As major revenue comes from the United States revenue is affected by exchange rate fluctuations (Bennet, 1991). In July 1984, exchange rate was 1.355 $/£. Future exchange rate would be dependent on inflation in both countries and PPP.

Dollar is getting appreciated very fast against sterling. In first quarter of 1975, exchange rate was 2.418 $/£ which came down to 1.353 $/£. Also, growth of unit sales from the United States in last 4 years is 82% and growth of unit sales from rest of the world is 1%. As United Sates will be major source of revenue for Jaguar Plc exchange rate would be very crucial for future cash flow.

It’s expected that average dollar inflation would be 3% while average pound inflation would be 5%. Higher pound inflation means pound would be depreciated against dollar. It will lower the revenue in pound keeping no of units sold constant. Company has 100 million outstanding shares.

As Government wants to privatize company and it’s required to estimate the share price of Jaguar. We will estimate the share price by valuing Company based on the future cash flow estimation.

Unit sales in United States:

Unit sales in United States improved by 105% from 1980 to 1981, by 93% from 1981 to 1982 and by 54% from 1982 to 1983. As unit sales improved from 2518 to 15,260 from 1980 to 1983 it’s expected that growth will slow down. As sales already improved we can’t expect the future growth in unit sales by 80% to 100% as witnessed during 1980 and 1981. We expect the future growth in unit sales would be 12%, 10%, 10%, 10% and 8% for next five years on an average.

Unit Sales in Rest of the world:

Unit sales in Rest of the world declined by 32% from 1980 to 1981. It improved by 26% from 1981 to 1982, by 20% from 1982 to 1983. But we expect the unit sales will grow by 12%, 10%, 10%, 10% and 8% for next five years due to higher demand from non-European country.

Unit price in United States & Rest of the world:

In 1984, expected unit price in the United States is $25,631. Unit price in the United States is expected to rise by 3%, inflation rate. In 1984, expected average unit price in rest of the world is £17,284 which is expected to rise by 5% for next five years.

Unit Sales in Rest of the World

Exchange Rate:

Dollar-Sterling exchange rate is estimated based on the expected dollar inflation and sterling inflation for next five years. Though revenue from different countries will be affected by sterling exchange rate cost would not be affected from exchange rate fluctuation (Swanson and Marshall, 2008). Fluctuation in dollar exchange rate would affect most revenue as unit sales from United States contribute more than 50% to overall unit sales.

Variable Cost Per Unit:

Variable cost is directly associated with the number of units produced in particular year (Investopedia, 2015). In 1983 Jaguar manufactured 28,041 units (Exhibit 5). Total cost of goods sold in 1983 was 361.1 million pound. Total cost of sales including depreciation was 369.7 million, depreciation amount was 8.6 million pound.

We expect variable cost per unit to be increased by pound inflation which is 5%.

Working Capital

As sales increases working capital requirement also increases (Keynes, 1930). Expecting overall sales growth by 18% working capital requirement also will be increased by 12%, 10%, 10%, 10% and 8% for next five years.

Depreciation

Depreciation is 10% of fixed asset in given year. In 1983, total book value of fixed amount was 112 million pounds. We expect fixed assets to be increased by 12%, 10%, 10%, 10% and 8% for next five years.

Distribution and Administration Cost

Distribution and Administration cost is expected to rise by 5% year on year with pound inflation.

Capital Expenditure

Capital expenditure is 11.5 million pound in 2014 which is expected to increase with sales growth. We have estimated capital expenditure will increase on average with same rate of sales growth.

Price earnings multiples and discounted free cash flow methods are used to value stock of Jaguar. Jaguar has 100 million shares.

Price earnings multiple used to compare the value of stocks based on earning ability. Higher growth companies have high price earnings multiple which values stock at higher price than peers with similar earnings per share but with slower growth rate.

In 1983, stocks of BMW, Benz and Porsche are trading at 17.68, 55.70 and 10.09 earning multiples. Considering 100 million outstanding shares and net income of 49.5 million in 1983, earning per share would be 0.50 pound.

Jaguar had negative net income in 1980 and 1981 and it recovered from losses in 1982 with net income of 9.6 million pound. Net income in 1983 was 50 million. Trend of net income clearly suggest that Jaguar’s earning is improving and will continue to improve in near term as well. So, we will value share at higher P/E of 25.

At P/E of 25 stock value would be 12.38 pound.

We have estimated the net income for Jaguar from 1984 to 1988 with assumption mentioned in Projection part. With our projections net income would be 68 million, 82 million, 98 million, 117 million and 137 million from year 1984 to 1988 respectively. Free cash flow to firm would be 66 million, 80 million, 96 million, 115 million and 134 million from 1984 to 1988.  

Terminal value is calculated assuming free cash flow will growth by 12% and cost of capital would be 18%. Present value of future cash flow (1984 to 1988) is 343 million. Total equity value of Jaguar including terminal value is 1639 million pound. As long term debt is 44 million pound total firm value would be 1595 million. As total outstanding shares are 100 million per share value would be 15.95 pound (Centre for Social Impact Bonds, 2014).  

If real value of dollar goes down exchange rate would go up and sterling would be stronger against dollar (Lioui and Poncet, 2005). So, if company doesn’t increase price in United States revenue from Untied States will go down when converting revenue in sterling from dollars (Arthur and Sheffring, 2003).

Exchange rate would be declining considering dollar inflation of 3% and pound inflation of 5%.

If real value of dollar goes down by 10% exchange rate would be increasing year on year.

As Untied States is major source of revenue (more than 50%) exchange rate would affect negatively revenue. If real value of dollar goes down by 10% stock price will go down to 3.07 pound from 15.95 pound.

If exchange rate goes up (real value of dollar goes down by 10%) market value firm would be 307 million and if exchange rate would goes down (normal scenario) market value of firm would be 1,595 million (Sanger and wines, 2010).

Market value exposure = 1,595 – 307 = 1,288 million

‘000 Sterling	1984	1985	1986	1987	1988
FCF 1	66,089	80,020	96,289	115,332	134,642
FCF 2	66,089	57,874	47,455	34,513	17,822
Delta	0	22,147	48,833	80,819	116,820

• Exposure is high because major revenue is in dollar.
• If real value of dollar goes down Jaguar can’t increase price in United States more than inflation rate (Peters, 2015).
• Exchange rate has cumulative effect as dollar value goes down year on year.

If Jaguar considers exchange range is going to be unfavorable for future sales it should enter into forward agreement. Jaguar can enter into agreement for selling certain number of units with dealers, resellers in a year at certain price in pound (Abdullah, 2014). Jaguar has to enter in forward contract with buyer in pound currency as exchange rate is unfavorable for revenue in dollar currency.

This type of forward contract is important as real value is going down. Jaguar can enter into contact annually till real value of dollar improves (Lyons, 2015).

Exchange Rate

If dollar weakens against sterling it will lower the revenue in sterling and share price will go down. U.S investor who invested in Jaguar shares will get benefit only if share price will remain stable or go up in sterling. As dollar depreciates against sterling U.S investor would get more dollars if they sell shares in pounds and convert it into dollars. But as drop in share price would be much higher than depreciation of dollar exchange rate. So, U.S investor is also ill affected if dollar depreciates against sterling.

No, exposure to dollar based investor and pound based investor is significantly different.

• If dollar appreciates against pound, total revenue and cash flow of Jaguar would improve and share price will go up (Neugebaner, 1059). For pound based investor gain is higher as dollar based investor has to convert pound into dollar, and as dollar is appreciated same amount of pound will fetch lesser dollars.
  • So if dollar appreciates pound based investor is better off.
• If dollar depreciates cash flow would be affected and share price would go down. For pound based investor loss would be higher than dollar based investor as dollar based investor will recover some loss due to favorable exchange rate position (Shannon and Reilly, 2000).
  • So if dollar depreciates dollar based investor is better off.

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