Question

You are a security analyst responsible for following Jaguar's stock after it
floats. (Assume the company had 100 million shares outstanding.)
What is your estimate of Jaguar's stock price given a 10% drop in the real
value of the dollar? FCF valuation method is what we used on the previous question....this is the follow-up question...What is Jaguar’s market value exposure (and delta) with respect to the real dollar/sterling exchange rate?

			Projected
		1983	1984
1	Dollar/sterling		1.350
	United States
2	Growth, units (%)		12.0%
3	Volume, units	15260	17091
4	Inflation (%)		3.0%
5	US$ price/unit		25631
6	sales, dollars		438065
7	sales, sterling		324492
	Rest of the world
8	Growth, units (%)		12.0%
9	Volume, units	13207	14792
10	Inflation (%)		5.0%
11	price/unit , sterling		17284
12	sales, sterling		255662
13	var. cost of sales/unit		13521
14	NWC		30000
15	discount rate		18.0%
	Total sales, units		31883
16	Total revenues		580154
17	Var. cost sales		431091
18	Depreciation		10000
19	R&D		18000
20	Distribution	13300	13965
21	Administration	22000	23100
22	Total Costs		496156
23	EBIT		83999
24	Tax		29400
25	EBIAT		54599
26	Depreciation		10000
27	Operating cash flow		64599
28	Increase NWC		30000
29	Capital Expenditure		11500
30	FCF		23099
31	Terminal value
	discount factor		1.00
32	PV, FCF		23099
33	Value of firm (sterling)

Answer 1

a) What is your estimate of Jaguar's stock price given a 10% drop in the real value of the dollar?

A 10% depreciation of the US $ will lead to a new exchange rate of $ 1.485/£. This means that one would require more dollars to purchase one unit of the UK £. There the total number of sales generated from the USA will fall to £294993.2 reducing the present value of the cash flows. As a result, the stock price will drop from £230.99 to a value of £39.24.

b) What is Jaguar’s market value exposure (and delta) with respect to the real dollar/sterling exchange rate? What is Jaguar's free cash flow exposure (and delta) for the years 1985 to 1989 with respect to the real dollar/sterling exchange rate?

Assume a 1% depreciation in the US$ and a 1% appreciation in the dollar value. If the dollar appreciates by 1%, the new exchange rate will be $1.3365/£. The 1% appreciation in the dollar will lead to an increase in total value to £25230. A 1% depreciation of the dollar, on the other hand, will change the exchange rate to $1.3635/£. The value of the company will fall to £21011. Therefore, a slight change in the $/£ exchange rate may either be favorable or unfavorable for Jaguar. On average a 1% change in the value of $ would lead to a change in total value of £23,120.5 at the exchange rate of $1.35/£ which translates to $31,212.68 exposure. In conclusion, a permanent 1% change in dollar value will affect $31,212.68 of total assets of the company. The delta for the years 1985 to 1989 is 2%.