Corporate Finance Project: Jaguar and Ford Acquisition Analysis

This project provides a comprehensive analysis of Jaguar's financial performance, exploring the potential value creation resulting from its combination with Ford. It employs the Discounted Cash Flow (DCF) method to determine Jaguar's share price under various interest rate scenarios, including increases and decreases in US dollar, Deutsche Mark (DM), and Yen interest rates. The analysis delves into the currency management strategies Jaguar should adopt, focusing on the significant exposure to the US dollar and recommending hedging strategies, both financial and industrial, to mitigate currency risks. The project identifies Jaguar's exposure to the Yen, evaluates the exchange rates relevant to Ford, and determines which exposures Ford should prioritize, concluding with recommendations on whether Ford should implement hedging strategies to safeguard its financial interests. The project utilizes financial data from 1990 to 1995 to support its analysis and conclusions.

Running head: CORPORATE FINANCE
Corporate Finance
Name of the Student:
Name of the University:
Authors Note:

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Table of Contents
1. Depicting how value will be created by combining Jaguar and Ford:...................................2
2. Calculating share price of Jaguar suing DCF method:...........................................................2
3. Evaluating prices of Jaguar under different scenarios:..........................................................4
3a. Increase in $ interest rate by 25%:.......................................................................................4
3b. Increase in DM interest rate by 25%:...................................................................................4
3c. Increase in Yen interest rate by 25%:...................................................................................4
3d. Decrease in $ interest rate by 10%:......................................................................................5
3e. Decrease in DM interest rate by 10%:..................................................................................5
3f. Decrease in Yen interest rate by 10%:..................................................................................5
4. Depicting the currency Jaguar should manage more:............................................................6
5. Stating the exposure of Jaguar to dollar:................................................................................7
6. Stating how much should jaguar hedge, while describing financial and industrial hedging: 8
7. Depicting the exposure of Jaguar to Yen:..............................................................................9
8a. Stating which exchange rate is Jaguar exposed:..................................................................9
8b. Depicting the source of each exposure:...............................................................................9
8c. Stating which exposure should Ford care about:................................................................10
8d. Stating should Ford hedge:.................................................................................................10
Reference and Bibliography:....................................................................................................12

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1. Depicting how value will be created by combining Jaguar and Ford:
Jaguar and Ford mainly fall under automobile industry and are considered competitors
of each other. Hence, the acquisition of Jaguar could create the highest value for Ford, which
might help the company increasing value. In addition, the values will only be created with the
help of synergies that will be created by the company with the acquisition process. This
acquisition process might mainly help in generating the levels of synergies in production, and
revenue stream that could create value for Ford. Moreover, the combination of Jaguar and
Ford could allow both companies to combine their production and dealership. This could help
in generating high level of return from investment. In this context, Aliu, Pavelkova and
Dehning (2017) stated that companies with the help of acquisitions and mergers can create
value by combining their operations and increase the overall profitability.
In addition, the value will be created by combing the production system of both the
companies and reduce the actual cost of production. This value creation might help the
company in declining the costs and increasing the level of returns. Therefore, the combined
valuation of the company could help in generating the level of returns from investment.
Furthermore, the combination could help in generating high level of sales for the company, as
the combined dealership would increase the sales of the firm, while reducing the actual cost
of production. This combined valuation would allow both the companies to generate high
level of synergies and valuation for investment. Beshears et al. (2016) argued that without the
identification of synergies companies are not able to create the relevant value, which might
reduce financial stability of the combined company.
2. Calculating share price of Jaguar suing DCF method:
Period
1 2 3 4 5 6

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Particulars 1990 1991 1992 1993 1994 1995
Turnover (in
millions):
United States - in
$ $850.00
$1,076.9
0 $1,364.30 $1,728.40
$2,189.7
0 $2,774.20
Exchange Rate
$/£ 1.615 1.615 1.615 1.615 1.615 1.615
United States -
in £ £526.32 £666.81 £844.77 £1,070.22
£1,355.8
5 £1,717.77
Europe - in DM 434 572.7 755.6 997.1 1315.6 1735.9
Exchange Rate
DM/£ 3.022 3.022 3.022 3.022 3.022 3.022
Europe - in £ £143.61 £189.51 £250.03 £329.95 £435.34 £574.42
Total Turnover
in US & Europe £669.93 £856.32 £1,094.80 £1,400.16
£1,791.1
9 £2,292.19
United Kingdom £324.00 £404.80 £505.80 £632.10 £789.80 £986.80
Rest of World £172.80 £241.30 £337.00 £470.60 £657.20 £917.80
Total Turnover
- in £ £1,166.73
£1,502.4
2 £1,937.60 £2,502.86
£3,238.1
9 £4,196.79
Cost of Sales
-
£1,045.00
-
£1,350.4
0
-
£1,730.90
-
£2,222.10
-
£2,829.5
0
-
£3,608.80
Gross Profit £121.73 £152.02 £206.70 £280.76 £408.69 £587.99
Distribution,
Administration
and R&D Costs -£122.00 -£147.30 -£177.90 -£214.80 -£259.40 -£313.20
Net Operating
Profit -£0.27 £4.72 £28.80 £65.96 £149.29 £274.79
Increase in Net
Working Capital -113.2 -34.5 -45.1 -59 -77.3 -101.5
Free Cash Flow -£113.47 -£29.78 -£16.30 £6.96 £71.99 £173.29
Discount Rate 6.72% 6.72% 6.72% 6.72% 6.72% 6.72%
Discounted FCF -£106.33 -£26.15 -£13.41 £5.37 £52.01 £117.31
Total of
Discounted FCFs £28.80
Particulars Value
Value of Company after 1995 £2,579.13
PV of Value after 1995 £1,745.91

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Total Fair Value £1,774.72
Nos. of Shares 182.926
Fair Value per Shares (in £) £9.70
3. Evaluating prices of Jaguar under different scenarios:
3a. Increase in $ interest rate by 25%:
Particulars Value
Value of Company after 1995 £2,445.38
PV of Value after 1995 £1,655.37
Total Fair Value £1,659.37
Nos. of Shares 182.926
Fair Value per Shares (in £) £9.07
3b. Increase in DM interest rate by 25%:
Particulars Value
Value of Company after 1995 £2,644.64
PV of Value after 1995 £1,790.26
Total Fair Value £1,830.28
Nos. of Shares 182.926
Fair Value per Shares (in £) £10.01

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3c. Increase in Yen interest rate by 25%:
Particulars Value
Value of Company after 1995 £2,579.13
PV of Value after 1995 £1,745.91
Total Fair Value £1,774.72
Nos. of Shares 182.926
Fair Value per Shares (in £) £9.70
3d. Decrease in $ interest rate by 10%:
Particulars Value
Value of Company after 1995 £3,133.60
PV of Value after 1995 £2,121.26
Total Fair Value £2,252.88
Nos. of Shares 182.926
Fair Value per Shares (in £) £12.32
3e. Decrease in DM interest rate by 10%:
Particulars Value
Value of Company after 1995 £2,847.98
PV of Value after 1995 £1,927.91
Total Fair Value £2,002.77
Nos. of Shares 182.926
Fair Value per Shares (in £) £10.95

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3f. Decrease in Yen interest rate by 10%:
Particulars Value
Value of Company after 1995 £2,579.13
PV of Value after 1995 £1,745.91
Total Fair Value £1,774.72
Nos. of Shares 182.926
Fair Value per Shares (in £) £9.70
4. Depicting the currency Jaguar should manage more:
Figure 1: Depicting the revenue of Jaguar
(Source: As depicted in the case study)
From the overall evaluation of above tables relevant exposure of Jaguar can be
calculated, which might hamper their actual revenue from currency conversion. The
maximum of revenue that is generated by Jaguar is from US, which relevantly indicates the
exposure of dollar, which needs to be managed by the company. In addition, the evaluation of
above figure mainly helps in detecting the overall percentage sales, which is conducted in US
by Jaguar. The evaluation indicates that maximum of the sales are mainly on US dollar,
which states the Jaguar should manage the US Dollar adequately for reducing any kind of
losses, which might incur from currency exchange. The US sales Vs worldwide sales depict a
relevant sales percentage to 41%, which indicates that maximum revenue is generated from
sales in US. Hence, the organisation needs to manage US dollar for curbing the loses, which
might incur from the exchange rate (Bruni et al. 2015).

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5. Stating the exposure of Jaguar to dollar:
Figure 2: Depicting the financial data of Jaguar
(Source: As depicted in the case study)
The above figure relevantly depicts the overall financial data of Jaguar, which could
help in generating the level of return from investment. The major revenue is generated from
US, which can be seen from above figure. In addition, the financial performance is dependent
on the revenue that is generated in dollars and needs to be converted in pound for increasing
the level of returns from investment. Furthermore, without the conversion of sales in pound
the actual revenue that is generated by the company is not evaluated. Hence, the risk
exposure of Jaguar is immense in terms of dollar revenue. Any decline in the currency value

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might hamper actual valuation of the stock and directly affect its revenue generating capacity.
Therefore, Jaguar needs to conduct adequate valuation and adjust for their exposure in the
market, which could help in reducing the losses from currency conversion (Hung et al. 2018).
6. Stating how much should jaguar hedge, while describing financial and industrial
hedging:
Particulars 1990 1991 1992 1993 1994 1995
United States - in £ 45.11% 44.38% 43.60% 42.76% 41.87% 40.93%
Europe - in £ 12.31% 12.61% 12.90% 13.18% 13.44% 13.69%
United Kingdom 27.77% 26.94% 26.10% 25.26% 24.39% 23.51%
Rest of World 14.81% 16.06% 17.39% 18.80% 20.30% 21.87%
From the overall evaluation sales percentage that is generated from US is the highest,
which might affect the total revenues of the company. In addition, Jaguar needs to hedge its
exposure in US for curbing the losses that might incur from volatile currency market. The
combined Europe sales are not close to the revenue that is generated from US sales. Jaguar
needs to use hedging instruments such as forwards and future contracts for curbing the losses
that might incur from currency conversion. The 40% of total revenue that is generated from
Jaguar needs to be hedged for shortening the losses in currency conversation. The use of
future contacts can reduce the relevant losses from operations. In addition, this derivatives
contract might allow the company to hedge its exposure in the currency market and reduce
any kind of expected losses, which might incur from currency market (Pfaff 2016).
Therefore, buying future contracts of dollar might help in reducing the losses from currency
conversion for Jaguar.

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7. Depicting the exposure of Jaguar to Yen:
The current exposure of Jaguar in Japan is relatively lower than other countries, where
operations of the company has not been conducted adequately. In addition, the revenue
generated from japan is relevant low, which reduced the implication and exposure of Jaguar
in Yen. This relevant exposure of the company might directly affect the overall profitability,
which might incur from operations. This exposure from currency conversion is relatively low,
where the actual revenue that is generated in Japan can be hedged with using appropriate
instrument (Zhang, Liu and Xu 2014).
8a. Stating which exchange rate is Jaguar exposed:
In perspective of Ford a US-based shareholder Jaguar is mainly exposed to DM and
Pound currency, which could hamper relevant profits of the shareholders. In addition, the
major exposure of the company is mainly on pound, where the actual expenses are been
conducted for the production of cars. This exposure of the Jaguar after the acquisition might
be controlled with the help of hedging process, which might be useful for US-based
shareholder to increase their return from investment. Being a US-based shareholder the
relevant revenues that is been generated outside US needs to be hedged for reducing the
negative impact from currency conversion. In addition, the operations of Jaguar need to be
evaluated based on US dollars, which might help in generating high rate of return from
investment (Damodaran 2016).
8b. Depicting the source of each exposure:
There are two different sources of each exposure, which is generated from pound and
DM. The high-end exposure for US-Based shareholders can be conducted by hedging
adequate pound in comparison to dollar. In addition, the exposure from pound is due to the
production facility, which is located in UK. In addition, the sales revenue from Europe and

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Germany is also conducted by the company over the period. Therefore, the revenues and
expenses incurred in UK is the major source of exposure for the pound currency. The second
source of exposure is the currency DM, which is generated from Germany. Jaguar conducts
adequate sales in Germany, which could increase the accumulation of DM by the company
and needs to be converted in US dollar. Moreover, this source of exposure is relevantly high,
as the company obtains adequate revenue from the sales of cars in Germany, as depicted in
case study (Fracassi 2016).
8c. Stating which exposure should Ford care about:
From the overall evaluation, exposure in pound needs to be assessed by Ford and can
take relevant measure to control risk from currency exchange. In addition, Ford after
acquiring Jaguar needs to be concerned regarding exposure in pound that is made by the
company. Hence, the exposure in pound is the main concern for the company, as the overall
revenue and expense are in pound. This would directly hamper the actual performance of the
company if Ford is not careful in hedging their exposure in the UK market. Furthermore, the
exposure on DM also needs to be evaluated by Ford, as adequate revenue is generated from
Europe division of Jaguar (Foley and Manova 2015). Therefore, exposure in currency market
and commodity market needs to be conducted by Ford for reducing the risk from their
investment.
8d. Stating should Ford hedge:
From the overall evaluation, Jaguar has relevant exposure in pound and DM, which
needs to be hedged adequately for reducing risk from currency market. In addition, the
exposure in the current market mainly needs to be reduced by using adequate level of
hedging contracts such as futures and forward contracts. In this context, Scholes (2015)
mentioned that companies with the help of hedging process can reduce the risk from volatile

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markets in which they are trading. Furthermore, the evaluation mainly helps in depicting the
risk, which mouth hamper the actual profits of the organisation. On the other hand,
Bazdresch, Kahn and Whited (2017) criticises that hedging process without evaluation does
not provide adequate return for the organisation, while increase the chance of risk from
investment. Therefore, Ford needs to have adequate hedging contract for both pound and
DM, which could help in generating high level of returns from investment.

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Reference and Bibliography:
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automotive industry in the Czech Republic.
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finance models. The Review of Financial Studies, 31(1), pp.322-361.
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Disclosure Increase Portfolio Risk Taking?. The review of financial studies, 30(6), pp.1971-
2005.
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enhanced indexation in portfolio optimization. OR spectrum, 37(3), pp.735-759.
Damodaran, A., 2016. Damodaran on valuation: security analysis for investment and
corporate finance (Vol. 324). John Wiley & Sons.
Ehrhardt, M.C. and Brigham, E.F., 2016. Corporate finance: A focused approach. Cengage
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finance. economics, 7(1), pp.119-146.
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Hillier, D., Clacher, I., Ross, S., Westerfield, R. and Jordan, B., 2014. Fundamentals of
corporate finance. McGraw Hill.

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Hung, K., Yang, C.W., Zhao, Y. and Lee, K.H., 2018. Risk Return Relationship in the
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