Pro Given Initial cost of equipment Project and equipment life Salvage value of equipment Working capital requirement Depreciation method Depreciation expense Discount rate Tax rate Base case Unit sales Price per unit Variable cost per unit Fixed costs Best Case Solution Revenues Variable cost Fixed Expenses Gross profit Depreciation Net operating income Income tax expense Net income Cash flow $0 $0 #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! NPV Expected Case Solution Revenues Variable cost Fixed Expenses Gross profit Depreciation Net operating income Income tax expense NOPAT plus: Depreciation less: CAPEX less: Working capital investment Free cash flow $0 $0 #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! NPV Worst Case Revenues Variable cost Fixed Expenses Gross profit Depreciation Net operating income Income tax expense Net income Cash flow NPV=PV(E12,E7,D50)-E6 NPV Assuming the negative tax credit obtained here can used so Solution $0.00 $0.00 $0.00 $0.00 #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! Problem 3-1 Given Straight-Line #DIV/0! Worst case 0 $0.00 $0.00 $0.00 Best Case 11000 $0.00 $0.00 $0.00 Solution Excel formula in previous column F17*F18 F17*F19 F20 D25-D26-D27 E11 D28-D29 D30* E13 D30-D31 D32+D29 #DIV/0! Solution Excel formula d17*d18 d17*d19 d20 D25-D26-D27 E11 D28-D29 D46* e13 D30-D31 D32+D29 #DIV/0! e tax credit obtained here can used somewhere else or carried forward Solution Excel formula in previous column E17*E18 E17*E19 E20 D42-D43-D44 E11 D45-D46 D47*E13 D47-D48 D32+D29 #DIV/0! Problem 3-2 Given Initial cost of equipment Project and equipment life Salvage value of equipment Working capital requirement Depreciation method Depreciation expense Discount rate Tax rate Base case Unit sales Price per unit Variable cost per unit Fixed costs Part a. Expected Case Solution Revenues Variable cost Fixed Expenses Gross profit Depreciation Net operating income Income tax expense NOPAT plus: Depreciation less: CAPEX less: Working capital investment Free cash flow $0 $0 #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! NPV Part b. Breakeven unit annual sales Part c. Breakeven unit price (unit sales +15%) 8,901 $ 113.70 oblem 3-2 Given Straight-Line #DIV/0! Worst case 0 $0.00 $0.00 $0.00 Best Case $0.00 $0.00 $0.00 Solution Excel formula d17*d18 d17*d19 d20 D25-D26-D27 E11 D28-D29 D46* e13 D30-D31 D32+D29 #DIV/0! Problem 3-3 Given: Expected Values Sales units Unit price Fixed operating costs Variable operating costs per unit Tax rate Depreciation expense CAPEX Working capital investment 120,000 $ 30% 60,000 a. Sales less: Variable operating costs less: less: Fixed operating costs Net Operating Profit less: Taxes NOPAT plus: Depreciation expense less: CAPEX less: Working capital investment Free cash flow b. $ $ $ (60,000) (120,000) (180,000) 54,000 (126,000) 60,000 - Distributional Assumptions Uniform Normal NA Triangular NA NA Uniform Triangular m 3-3 Parameter Estimates max = 150,000; Min = 50,000 Meam = $50, standard deviation = $10 NA min = $30;most likely = $35; max = $40 NA NA min = $60,000; max = $90,000 min = $18,000; most likely = $20,000; max = $22,000 PROBLEM 3-1: Clayton Manufacturing Company Given EBITDA (Year 1) Growth Rate in EBITDA Initial investment Depreciation (Straight line) over Estimated salvage value Tax rate Cost of capital $ $ $ 200,000 5% 800,000 5 years 35% 12% Solution Years a. EBITDA Less: Depreciation Expense EBIT Less: Taxes NOPAT Plus: Depreciation Expense Less: CAPEX Less: Change in Working Capital Project FCF 0 $ - 1 200,000 2 - b. NPV c. Using "Goal Seek" to solve for the EBITDA in year 1 (C5) that yields a NPV of 0 (C28). Breakeven Year 1 EBITDA - Manufacturing Company Solution Legend = Value given in problem = Formula/Calculation/Analysis required = Qualitative analysis or Short answer required = Goal Seek or Solver cell = Crystal Ball Input = Crystal Ball Output tion Years 3 4 - 5 - - PROBLEM 3-2: Breakeven Sensitivity Analysis Given Investment (enter with "-" sign) Plant life Salvage value Variable Cost % Fixed operating cost Tax rate Working capital $ $ $ Required Rate of Return Sales volume multiple (4,000,000) 5 Years 400,000 45% 1,000,000 38% 10% (Percent of the expected change in revenues for the year) 15% 1.00 Year 0 Sales volume Unit price Revenues Variable Operating Costs Fixed Operating Costs Depreciation Expense Net Operating Income Less: Taxes NOPAT Plus: Depreciation Less: CAPEX Less: Working Capital Free Cash Flow NPV IRR Equivalent Annual Cost $ $ $ $ $ $ (4,000,000) (200,000) (4,200,000) $ 1 1,000,000 2.00 $ 2,000,000 (900,000) (1,000,000) (800,000) (700,000) $ 266,000 (434,000) $ 800,000 (100,000) 266,000 $ 2 1,500,000 2.00 3,000,000 (1,350,000) (1,000,000) (800,000) (150,000) 57,000 (93,000) 800,000 (450,000) 257,000 419,435 18% 125,124 Solution a. What are the key sources of risk that you see in this project? b. Breakeven sensitivity analysis Variable Estimated Value Breakeven Value Percent Difference Initial Capex Variable Cost as a % of Sales Working Capital % of new Sales Sales volume multiplier c. Discuss results of part b. d. Should you always seek to reduce project risk? 1 49% 27% 0.92 sitivity Analysis Solution Legend = Value given in problem = Formula/Calculation/Analysis required = Qualitative analysis or Short answer required = Goal Seek or Solver cell = Crystal Ball Input = Crystal Ball Output Year $ $ $ $ 3 3,000,000 2.50 $ 7,500,000 (3,375,000) (1,000,000) (800,000) 2,325,000 $ (883,500) 1,441,500 $ 800,000 (125,000) 2,116,500 $ 4 3,500,000 2.50 5 $ 2,000,000 2.50 8,750,000 5,000,000 (3,937,500) (2,250,000) (1,000,000) (1,000,000) (800,000) (800,000) 3,012,500 $ 950,000 (1,144,750) (361,000) 1,867,750 $ 589,000 800,000 800,000 248,000 375,000 500,000 3,042,750 $ 2,137,000 Solution Legend = Value given in problem = Formula/Calculation/Analysis required = Qualitative analysis or Short answer required = Goal Seek or Solver cell = Crystal Ball Input = Crystal Ball Output PROBLEM 3-3ab: Bridgeway Pharmaceuticals Given Investment cost (today) Project life Depreciation expense Waste disposal cost savings per year Labor cost savings per year Sale of reclaimed waste Required rate of return Tax rate $ $ $ $ $ (400,000) 5 years 80,000 18,000 40,000 200,000 20% 35% Solution Part a. Cash flow estimation Investment Waste disposal cost savings per year Labor cost savings per year Proceeds from sale of reclaimed waste materials EBITDA Less: Depreciation Additional EBIT Less: Taxes NOPAT Plus: Depreciation Less: Capex Less: Additional working capital FCF Year $ 0 (400,000) 1 2 - - NPV IRR Analysis b. If sale of reclaimed waste drops in half, NPV Critical B-E for sale of waste materials Critical B-E Price decline in salvage materials c. See next worksheet To answer part b. simply substitute $100,000 sale of reclaimed waste in C10. Solver has been used to find this answer. Details given in text box above. The terminal period growth rates were estimated such that the intrinsic valuation of the firm's equity would equal the current market capitalization of the firm using the "Goal Seek" function. armaceuticals Solution Legend = Value given in problem = Formula/Calculation/Analysis required = Qualitative analysis or Short answer re = Goal Seek or Solver cell = Crystal Ball Input = Crystal Ball Output Year 3 4 - simply substitute $100,000 for the waste in C10. used to find this answer. xt box above. 5 - - Solution Legend = Value given in problem = Formula/Calculation/Analysis required = Qualitative analysis or Short answer required = Goal Seek or Solver cell = Crystal Ball Input = Crystal Ball Output PROBLEM 3-3c: Bridgeway Pharmaceuticals Given Investment cost (today) Project life Depreciation expense Waste disposal cost savings per year Labor cost savings per year Sale of reclaimed waste Required rate of return Tax rate Correlation (Year to year) in Proceeds from reclaimed waste $ $ $ $ $ (400,000) 5 years 80,000 18,000 40,000 200,000 20% 35% 0.90 Solution c. Cash flow estimation Investment Waste disposal cost savings per year Labor cost savings per year Proceeds from sale of reclaimed waste EBITDA Less: Depreciation Additional EBIT Less: Taxes NOPAT Plus: Depreciation Less: Capex Less: Additional working capital FCF NPV IRR Part i. 0 1 40,000 - Note: Your results from the simulatio here where you did not use the same fact, if you do not "fix" the same seed slightly from one simulation of the sa Preferences/Sampling). Part ii. Part iii. Bridgeway Pharmaceuticals Solution Legend = Value given in problem = Formula/Calculation/Analysis required = Qualitative analysis or Short answer required = Goal Seek or Solver cell = Crystal Ball Input = Crystal Ball Output Solution Year 2 3 4 5 40,000 40,000 40,000 40,000 - - - - Your results from the simulation experiment will differ slightly from those reported ere where you did not use the same "seed" value for the random number generator. In ct, if you do not "fix" the same seed value for each simulation your results will differ ightly from one simulation of the same problem to another (see Run references/Sampling). PROBLEM 3-4: TitMar Motor Company Given Assumptions and Predictions Price per unit Market share (%) Market size (Year 1) Growth rate in market size beginning in Year 2 Unit variable cost Fixed cost Tax rate Cost of capital Investment in NWC Initial investment in PP&E Depreciation (5 year life w/no salvage) $ $ $ $ $ $ Estimates 4,895 15.00% 200,000 5.00% 4,250 9,000,000 50.00% 18.00% of the predicted change in firm 5.00% revenues. 7,000,000 1,400,000 Solution Year Investment Revenue Variable Cost Fixed cost Depreciation EBT(Net Operating Income) Tax Net Operating Profit after Tax (NOPAT) Plus: Depreciation expense Less: Capex Less: Change in NWC Free Cash Flow $ Net Present Value Internal Rate of Return $ 0 (7,000,000) 1 $ $ $ (7,000,000) (7,342,500) (14,342,500) $ 146,850,000 (127,500,000) (9,000,000) (1,400,000) 8,950,000 (4,475,000) 4,475,000 1,400,000 (367,125) 5,507,875 9,526,209 39.82% Units Sold 30,000 a. If the market share is only 5% then the project's NPV = b. If market share = 15% and the price of the PTV falls to $4,500 the NPV = Breakeven Sensitivity Analysis Price per unit Market share (%) Market size (Year 1) Growth rate in market size beginning in Year 2 Unit variable cost Critical % Change Critical Value Fixed cost Tax rate Cost of capital Investment in NWC Analysis: TitMar Motor Company Part a. Substitute 5% for market share (%) . Part b. Substitute $4,500 for the price per unit. Solution Year 2 $ $ $ 3 154,192,500 (133,875,000) (9,000,000) (1,400,000) 9,917,500 $ (4,958,750) 4,958,750 $ 1,400,000 (385,481) 5,973,269 $ 31,500 4 161,902,125 (140,568,750) (9,000,000) (1,400,000) 10,933,375 $ (5,466,688) 5,466,688 $ 1,400,000 (404,755) 6,461,932 $ 33,075 5 169,997,231 (147,597,188) (9,000,000) (1,400,000) 12,000,044 $ (6,000,022) 6,000,022 $ 1,400,000 (424,993) 6,975,029 $ 34,729 178,497,093 (154,977,047) (9,000,000) (1,400,000) 13,120,046 (6,560,023) 6,560,023 1,400,000 8,924,855 16,884,878 36,465 Solution Legend = Value given in problem = Formula/Calculation/Analysis required = Qualitative analysis or Short answer required = Goal Seek or Solver cell = Crystal Ball Input = Crystal Ball Output PROBLEM 3-5: TitMar Motor C Given Assumptions and Predictions Price per unit Market share (%) Market size (Year 1) Growth rate in market size beginning in Year 2 Unit variable cost Fixed cost Tax rate Cost of capital Investment in NWC Initial investment in pp&e Depreciation (5 year life w/no salvage) $ Estimates 4,895 200,000 5.00% 4,250 9,000,000 50.0% 18.00% 5.00% of the predicted change in firm revenues. 7,000,000 1,400,000 $ $ $ $ Solution Year 0 Investment Growth rate in market size Market Size (total PTV sold) Market Share (units sold by Titmar) Revenue Variable Cost Fixed cost Depreciation EBT(Net Operating Income) Tax Net Operating Profit after Tax (NOPAT) Plus: Depreciation expense Less: Capex Less: Change in NWC Free Cash Flow Net Present Value Internal Rate of Return 1 - OBLEM 3-5: TitMar Motor Company Solution Legend = Value given in problem = Formula/Calculation/Analysis required = Qualitative analysis or Short answer required = Goal Seek or Solver cell = Crystal Ball Input = Crystal Ball Output Solution Year 2 - 3 4 - 5 - - PROBLEM 3-6: Biolizer Problem--Decision Tree Given EPA after-tax cost Abandonment Value Probability of Good EPA Ruling $ $ 80,000 350,000 80% Solution Panel a. No Option to Abandon Favorable EPA Ruling--Expected Project FCFs $ NPV (Favorable EPA Ruling) = 2010 2011 (580,000) $ 87,600 $ 2012 78,420 $ 2013 93,320 Unfavorable EPA Ruling--Expected FCFs NPV (Unfavorable EPA Ruling) Revised Expected Project FCFs E[NPV] with No Option to Abandon Panel b. Option to Abandon 2010 2011 2012 2013 Project Not Abandoned (Favorable EPA) NPV (Favorable EPA Ruling) = Project Abandoned (Unfavorable EPA) NPV (Unfavorable EPA Ruling) Revised Expected Project FCFs E[NPV] with the Option to Abandon Analysis: $ - $ - ee Solution Legend 2014 $ 109,710 $ 2014 $ 2015 658,770 2015 - $ - = Value given in problem = Formula/Calculation/Analysis required = Qualitative analysis or Short answer required = Goal Seek or Solver cell = Crystal Ball Input = Crystal Ball Output PROBLEM 3-7: Introductory Simulation Analysis Exercises a. Jason Enterprises Given Solution Legend Operating Earnings/Sales Sales (upper limit) Sales (lower limit) $ $ = Value given in problem = Formula/Calculation/Analysis req = Qualitative analysis or Short ans = Goal Seek or Solver cell 25% 10,000,000 7,000,000 Solution = Crystal Ball Input = Crystal Ball Output Forecasted Sales Operating Earnings b. Aggiebear Dog Snacks, Inc. Given Revenues Cost of Goods sold/Revenues Minimum Most likely Maximum Minimum Maximum Solution Forecasted Sales Cost of Goods Sold/Sales Part i-iii. Sales Less: Cost of Goods Sold Operating Earnings $ $ $ 18,000,000 25,000,000 35,000,000 70% 80% Solution Legend iven in problem a/Calculation/Analysis required tive analysis or Short answer required eek or Solver cell Ball Input Ball Output PROBLEM 3-8: Rayner Aeronautics Given Investment Outlay (Year 0) Year 1 Expected Cash Flow Required Rate of Return $ $ 12,500,000 2,000,000 18% Solution a. Break-Even Growth Rate in Cash flows Year 0 1 2 3 4 5 Growth Rate Cash Flows 0 b. Simulation Model Variable Year 1 cash flow Normal distribution Annual Growth Rates Year 2 3 4 5 Year 0 1 2 3 4 5 c. Results of Simulation NPV IRR Triangular Distrbution Most likely 40.00% 40.00% 40.00% 40.00% Growth Rate Cash Flows Expected NPV Expected IRR see mean value in chart below see mean value in chart below ronautics Solution Legend = Value given in problem = Formula/Calculation/Analysis required = Qualitative analysis or Short answer required = Goal Seek or Solver cell = Crystal Ball Input = Crystal Ball Output NPV = Mean Triangular Distrbution Minimum 20.00% 10.00% 5.00% 2.50% Std. Deviation Maximum 80.00% 160.00% 320.00% 640.00% PROBLEM 3-9: ConocoPhillips Natura Given ConocoPhillips's Cost of Capital for project Project life 15.00% 10 years Solution 1. Investment Increase in NWC MACRS Depr Rate (7 year) Natural Gas Wellhead Price (per MCF) Volume (MCF/day) Days per year Fee to Producer of Natural Gas Compression & processing costs (per MCF) $ 0 1,200,000 145,000 1 2 0.1429 6 900 365 $3.00 0.65 0.2449 Cash Flow Calculations Natural Gas Wellhead Price Revenue Lease fee expense Compression & processing costs Depreciation expense Net operating Profit Less: Taxes (40%) Net operating profit after tax (NOPAT) Plus: Depreciation expense Return of net working capital Project Free Cash Flow NPV IRR 2a-c. Scenario Summary Current Values Best Case Most Likely Case Changing Cells NG Price 6 8 6 Production Rate 900 1200 900 Result Cells NPV IRR Notes: Current Values column represents values of changing cells at time Scenario Summary Report was created. 3. Breakeven Sensitivity Analsyis Students should use Goal Seek in Excel to answer this question. a. Breakeven nautral gas price for an NPV = 0 b. Breakeven natural gas volume in Year 1 for an NPV = 0 c. Breakeven investment for an NPV = 0 4. Student answers will vary but most will probably recommend the project. M 3-9: ConocoPhillips Natural Gas Wellhead Project Solution 3 4 0.1749 Worst Case 3 700 mmary Report was created. on. 0.1249 Years 5 0.0893 6 0.0893 7 0.0893 8 0.0445 9 project. Solution Legend 10 = Value given in problem = Formula/Calculation/Analysis required = Qualitative analysis or Short answer required = Goal Seek or Solver cell = Crystal Ball Input = Crystal Ball Output PROBLEM 3-10: Blended Profile Applied, per Aircraft B737-700 Given Purchase Cost (pre-installed) $000 Installation $000 Downtime Days (installation) Downtime Cost/Day $000 Salvage % Gen. Escalation Marginal Tax Rate Discount Rate ######## $ (56,000) 1 $ (5,000) 15.00% 3.00% 39.00% 9.28% Airframe Maintenance Cost Useful Life (yrs) Average Runway Savings Facility cost Depreciation Fuel Price (all-in) Fuel (gallons saved) Solution Legend = Value given in problem = Formula/Calculation/Analysis required = Qualitative analysis or Short answer required = Goal Seek or Solver cell = Crystal Ball Input = Crystal Ball Output $ (2,100) per year 20 $ 500 per year $ 1,200 per aricraft MACRS (see below) $ 0.80 includes delivery, taxes and into plane charges 178,500 Solution 0 1 2 3 4 5 6 Winglet Purchase Winglet Installation Install. Downtime costs Airport Reconfiguration Fuel Savings Airframe Maint. Costs Reduced restrictions (inflated 3%/yr) Less: depreciation EBIT Less: Income Tax Net Income Plus: Depreciation Operating Cash Flow Salvage Value Tax on Salvage Value Total Project Cash Flow b. NPV IRR MIRR DEPRECIATION DETAILS Normal Year 1(a) Table x Additional valid til 9/11/04 50.00% 50.00% Total (modified table) 1 14.29% 7.15% 50.00% 57.15% 2 24.49% 12.25% 12.25% 3 17.49% 8.75% 8.75% 4 12.49% 6.25% 6.25% 5 8.93% 4.47% 4.47% 6 8.92% 4.46% 4.46% 7 8.93% 4.47% 4.47% 8 4.46% 2.23% 2.23% (a) Job Creation and Worker Assistance Act of 2002 MACRS Table c. Breakeven fuel cost Breakeven fuel savings Normal Table per gallon gallons d. Current Values Best Case Worst Case Changing Cells Fuel Price $ 0.80 $ 1.10 $ 0.50 Gallons Saved 178,500 214,000 142,000 Result Cells NPV IRR MIRR Notes: Current Values column represents values of changing cells at time Scenario Summary Report was created. e. f. Impact on NPV and IRR if winglets have no salvage value. NPV IRR Tax Depr 7 8 9 Year 10 11 12 13 14 15 16 17 18 19 20 . JAGUAR LAND ROVER PLC: BOND VALUATION S. Veena Iyer wrote this case solely to provide material for class discussion. The author does not intend to illustrate either effective or ineffective handling of a managerial situation. The author may have disguised certain names and other identifying information to protect confidentiality. This publication may not be transmitted, photocopied, digitized or otherwise reproduced in any form or by any means without the permission of the copyright holder. Reproduction of this material is not covered under authorization by any reproduction rights organization. To order copies or request permission to reproduce materials, contact Ivey Publishing, Ivey Business School, Western University, London, Ontario, Canada, N6G 0N1; (t) 519.661.3208; (e) cases@ivey.ca; www.iveycases.com. Copyright © 2015, Management Development Institute Gurgaon and Richard Ivey School of Business Foundation Version: 2015-07-31 Jaguar Land Rover Automotive plc (JLR), a wholly owned subsidiary of the Indian company Tata Motors Limited, announced, on March 3, 2015, an issue of Senior Notes (bonds) worth US$500 million 1 and due in 2020 at a coupon rate of 3.5 per cent per annum (p.a.), interest payable semi-annually. The net proceeds of this issue were to be primarily applied to repurchase the company’s outstanding Senior Notes worth $410 million, issued on May 19, 2011, and due on May 15, 2021(see Exhibit 1). These outstanding Notes carried a coupon rate of interest of 8.125 per cent p.a., payable two times per year.2 In March 2015, the indicative pricing of these Notes in the Luxemburg Bourse signaled an 11 per cent premium over face value (see Exhibit 2). The reference treasury security for these Notes was the U.S. Treasury Notes due May 15, 2016, that carried a coupon of 0.25 per cent p.a. (see Exhibit 3). This issue was the company’s second such refinancing in two months. The bond buyback was to be through a tender offer starting immediately and ending on March 30, 2015. Existing bondholders had an option to sell their holdings to the company or roll over their existing holdings to the new security.3 No company would forego such an opportunity to halve its interest expenses and improve its bottom line. But can such a simple, positive-sum game exist in an efficient market? JAGUAR LAND ROVER PLC The 2008 financial meltdown in the United States proved especially cruel to the auto sector companies. As part of its corporate survival, revival and restructuring strategy, Ford Motor Company sold its Jaguar 1 All currency amounts are shown in U.S. dollars unless otherwise indicated. Jaguar Land Rover Investor Relations, “Jaguar Land Rover Automotive PLC Pricing of $500 Million Senior Notes Offering,” March 3, 2015, www.jaguarlandrover.com/gl/en/investor-relations/news/2015/03/03/jaguar-land-rover-automotive-plc-pricing-of$500-million-senior-notes-offering, accessed March 9, 2015; Cbonds.com, “New Bond Issue: Jaguar Land Rover Sells USD 500.0 m in 2020 Bonds with a 3.5% Coupon,” March 5, 2015, http://cbonds.com/news/item/762013, accessed March 9, 2015. 3 Joel Rebello and Shally Seth Mohile, “Jaguar Land Rover to Raise $500 Million by Selling Bonds,” Livemint, March 3, 2015, www.livemint.com/Companies/4BIcevuWwtJPHysoGXxYgK/Jaguar-Land-Rover-to-raise-500-million-by-sellingbonds.html, accessed March 9, 2015. 2 . Page 2 and Land Rover brands to Tata Motors Ltd., an Indian automobile manufacturing company on June 2, 2008, for a net consideration of $2.3 billion4 (approximately GBP1.47 billion).5 The volumes of these brands saw a 32 per cent drop in the 10 months after the takeover, and JLR posted a net loss of GBP402.4 million for the period ending March 31, 2009.6 By fiscal year (FY) 2011, however, the company had managed a turnaround and posted a post-tax profit of GBP1,035.90 million.7 In 2011/12, JLR issued both dollar-denominated and pound-denominated debt to fund investments in its U.S. and European businesses respectively. This multi-currency funding also helped JLR to create a natural hedge for mitigating currency risk.8 The next four years saw JLR turning into the cash cow that supported the parent company in the face of a lackluster performance in the latter’s domestic market. For the year ended March 31, 2014, JLR comprised more than 80 per cent of the consolidated automobile sales revenue for Tata Motors and was solely responsible for the consolidated company posting operating profits (see Exhibit 4).9 By September 2013, ratings agency Moody’s Investors Service had upgraded JLR’s bond issues from Ba3 to Ba2 with a “stable” outlook. Besides the impressive volume and revenue growth as well as earnings before interest, tax, depreciation and amortization (EBITDA) margins posted by JLR, the ratings upgrade was attributable to the company’s positive free cash flows in FY2013 despite increased capital expenditures (capex) and dividend payments (see Exhibit 5). Another important factor contributing to this ratings upgrade was JLR’s conservative financial strategy in terms of leverage and comfortably spread- out bond repayments (see Exhibits 1 and 6).10 Analysts at Moody’s, however, expected the next few years to see free cash flows turning negative on the back of increased capital investment and research and development. Both Standard and Poor’s and Moody’s rating services maintained JLR’s credit rating at BB and Ba2 respectively, while revising their outlooks to “positive” in late 2014.11 With a capex of GBP3.6 billion to GBP3.8 billion lined up for FY2016, the chief financial officer of Tata Motors was quoted as saying the company was “cautiously optimistic about cash flow in JLR next year.”12 It was evident that JLR wanted to benefit from the impressive turnaround in its fundamentals. But would efficient bond markets allow firms to reap such benefits? Who gains and who pays in such deals? 4 Tata Motors Ltd, 2008/09 Annual Report, p. 11, www.domain-b.com/financials/companies/T/Tata_Motors/200809a20115564839718.pdf, accessed March 13, 2015. 5 Computed at an annual average rate of GBP0.6409 per US$, www.oanda.com/currency/historical-rates, accessed April 6, 2015. 6 Tata Motors Ltd, 2008/09 Annual Report, op. cit.; Jaguar Land Rover, 2010/11 Annual Report, p. 39 www.jaguarlandrover.com/media/2737/2010-2011_annual_report.pdf,both accessed March 13, 2015. 7 Ibid. 8 Jaguar Land Rover, 2010/11 Annual Report, p. 25, www.jaguarlandrover.com/media/2737/2010-2011_annual_report.pdf, accessed March 13, 2015. 9 Tata Motors Ltd. 2013/14 Annual Report, pp. 34-35, www.tatamotors.com/investors/pdf/2014/69-Annual-Report.pdf, accessed March 13, 2015. 10 Moody’s Investors Service, “Moody’s Upgrades Jaguar Land Rover to Ba2; Outlook Stable,” September 17, 2013, www.moodys.com/research/Moodys-upgrades-Jaguar-Land-Rover-to-Ba2-outlook-stable--PR_282278, accessed March 16, 2015. 11 Tata Motors Ltd., “Jaguar Land Rover Results for the Quarter Ended 30 September 2014,” November 14, 2014, p. 5, www.tatamotors.com/investors/pdf/2015/JLR-Results-Presentation-Q2-FY15.pdf, accessed March 16, 2015. 12 Jaguar Land Rover, March 2015 Bond Conference, p. 20, www.jaguarlandrover.com/gl/en/investorrelations/downloads/other-presentations, accessed March 20, 2015; Rebello and Mohile, op. cit. Page 3 EXHIBIT 1: JAGUAR LAND ROVER’S FINANCING ARRANGEMENTS AS AT DECEMBER 31, 2014 GBP millions A. Senior Notes GBP500m due 2020 (first call Mar 2016) GBP400m due 2022 US$410m due 2021 (first call May 2016) US$500m due 2023 (first call Feb 2018) US$700m due 2018 US$500m due 2019 B. Revolving 3- and 5-year credit C. Receivable factoring facilities Total Facility amount Annual Rate of interest Outstanding Undrawn 8.250% 5.000% 8.125% 5.625% 4.125% 4.250% 500 400 263 321 450 321 0 0 0 0 0 0 1,485 32 1,517 500 400 263 321 450 321 1,485 225 3,965 193 2,448 Note: GBP = British pound sterling. The company has used the GBP/US$ exchange rate prevailing on the balance sheet date in its annual and interim financial statements to convert the US$-denominated debt to GBP.13 Since the company earns approximately 17% of its revenue each in the United Kingdom and North America, for the purposes of this case, we assume that the natural hedge created mitigates any exchange-rate risk. The average GBP/US$ rate for March 2015 can be taken at 1.50.14 Source: Jaguar Land Rover plc FY2015, Q3 Interim Accounts, p. 6, www.jaguarlandrover.com/media/59285/fy15-q3-ifrsinterim-accounts-final.pdf, accessed March 13, 2015. EXHIBIT 2: JAGUAR LAND ROVER’S OUTSTANDING BONDS AND NOTES ON LUXEMBOURG BOURSE Coupon Rate; Security Start/End Dates 3.5%; USG5002FAE63 3.5%; US47010BAE48 3.875%; XS1195502031 3.875%; XS1195503351 8.125%; USG50027AB03 8.125%; US47009XAB55 8.25%; XS0765386627 8.25%; XS0765386973 06/03/2015–15/03/2020 06/03/2015–15/03/2020 24/02/2015–01/03/2023 24/02/2015–01/03/2023 19/05/2011–15/05/2021 19/05/2011–15/05/2021 27/03/2012–15/03/2020 27/03/2012–15/03/2020 Last Traded Date Price 12/03/2015 100 i % 12/03/2015 100 i % 06/03/2015 100 i % 06/03/2015 100 i % 04/02/2015 111.276 i % 07/08/2014 111.583 i % 30/01/2015 110.944 i % 30/01/2015 111.182 i % Note: The suffix ‘i’ in the last column stands for “indicative price,” also called “no-trade price.” This is used when no trades have happened in the security the previous day. Source: Bourse de Luxembourg website, www.bourse.lu/instrument/searchresults?searchtype=securities&code=&type Valeur=OBL*ORD*STR&libelle=&emetteur=jaguar+land+rover&emetteurId=, accessed April 1, 2015. 13 Jaguar Land Rover 2013/14 Annual Report, p. 110, www.jaguarlandrover.com/media/23108/annual-report-2014.pdf, accessed March 13, 2015. 14 Yahoo Finance, http://finance.yahoo.com/echarts?s=GBPUSD%3DX+Interactive#{%22customRangeStart%22:1425148200,%22customRan geEnd%22:1427740200,%22range%22:%22custom%22,%22allowChartStacking%22:true} accessed March 17, 2015. Page 4 EXHIBIT 3: YIELD CURVE FOR THE U.S. TREASURY — MAY 16, 2011 VERSUS MARCH 16, 2015 5.00% Yield % 4.00% 3.00% 2.00% 1.00% 0.00% 1MO 3MO 6MO 1YR 2YR 3YR 5YR 7YR 10YR 20YR 30YR Maturity (Note: Primary axis is not to scale) 3/16/2015 5/16/2011 Source: U.S. Department of the Treasury, “Treasury Yield Curve,” www.treasury.gov/resource-center/data-chartcenter/interest-rates/Pages/Historic-Yield-Data-Visualization.aspx, accessed April 1, 2015. EXHIBIT 4: JAGUAR LAND ROVER INCOME STATEMENTS, 2012–2015 Figures in GBP millions Revenue Material and other cost of sales Employee cost Other expenses Development costs capitalized Other income Depreciation &amortization Foreign exchange gain/ (loss) Finance income Finance expenses (net) Share of loss from joint ventures Profit before tax Income tax expense Profit after tax FY2012 13,512 (8,733) (1,039) (2,529) 751 37 (465) 14 16 (85) 1,479 (19) 1,460 FY2013 15,784 (9,904) (1,334) (3,075) 860 70 (622) (109) 34 (18) (12) 1,674 (460) 1,214 FY2014 19,386 (11,904) (1,654) (3,717) 1,030 153 (875) 236 38 (185) (7) 2,501 (622) 1,879 FY2015-9 months 16,040 (9,768) (1,427) (2,941) 850 150 (743) 58 36 (13) (24) 2,218 (482) 1,736 Note: GBP = British pound sterling; FY = fiscal year Source: Jaguar Land Rover plc Annual Report 2013/14, p. 104, www.jaguarlandrover.com/media/23108/annual-report2014.pdf; FY2015, Q3 Interim (unaudited) accounts, p. 7, www.jaguarlandrover.com/media/59285/fy15-q3-ifrs-interimaccounts-final.pdf, both accessed March 13, 2015. Page 5 EXHIBIT 5: JAGUAR LAND ROVER’S CASH FLOW STATEMENTS, 2012–2015 Figures in GBP millions Profit for the year Adjustments for: Depreciation & Amortization Finance expenses/ (income) Others Cash flows from operations before working capital adjustments Net cash generated from operations Investment in joint ventures Investment in property, plant and equipment Cash paid for intangible assets Cash used for other investments Net cash used for investing activities Finance expenses and fees paid Proceeds from short-term debt Repayment of short-term debt Proceeds from long-term debt Repayment of long-term debt Payment of lease obligations Dividends paid Net cash used/generated from financing activities Net change in cash and cash equivalents Cash and cash equivalents at the beginning of the year Cash and cash equivalents at the end of the year FY 2012 1,460 FY 2013 1,214 FY 2014 1,879 FY2015-9 months 1,736 466 69 96 622 (16) 475 875 100 577 743 (23) 610 2,091 2,500 (1) (596) (814) (131) (1,542) (128) 105 (655) 1,500 (374) (4) 2,295 2,429 (71) (891) (958) (689) (2,609) (179) 88 (250) 317 3,066 2,572 (124) (1,147) (885) 131 (2,025) (97) 21 (6) 313 444 1,402 (4) (150) (178) (358) 3,431 3,422 (92) (1,201) (1,155) (288) (2,736) (269) 1 (158) 829 (746) (5) (150) (498) 188 1,028 2,430 2,430 2,072 2,072 2,260 2,260 2,884 Note: GBP = British pound sterling; FY = fiscal year Source: Jaguar Land Rover plc Annual Report 2013/14, p. 106; FY2015, Q3 Interim (unaudited) accounts, p. 10, www.jaguarlandrover.com/media/59285/fy15-q3-ifrs-interim-accounts-final.pdf, accessed March 13, 2015. (4) (150) 77 624 Page 6 EXHIBIT 6: JAGUAR LAND ROVER BALANCE SHEETS, 2012–2015 Figures in GBP millions Property, plant &equipment Intangible assets Other non-current assets Total non-current assets Cash &cash equivalents Short-term deposits Trade receivables Inventories Other current assets Total current assets Total Assets Accounts payable Short-term borrowings and current portion of long-term debt Provisions &other current liabilities Total current liabilities Long-term debt Provisions Retirement benefit obligations Other non-current liabilities Total non-current liabilities Total Liabilities Ordinary share capital Reserves and surplus Equity attributable to shareholders Total Liability and Equity 662 1,497 646 5,235 10,217 FY2013 2,335 3,522 771 6,628 2,072 775 927 1,795 640 6,209 12,837 FY2014 3,184 4,240 935 8,359 2,260 1,199 831 2,174 766 7,230 15,589 FY2015-9 months 4,137 4,769 817 9,723 2,884 1,143 879 2,238 662 7,806 17,529 3,285 490 1,266 5,041 1,484 344 327 97 2,252 7,293 4,227 328 1,442 5,997 1,839 468 657 337 3,301 9,298 4,787 167 1,180 6,134 1,843 582 674 492 3,591 9,725 4,699 193 1,461 6,353 2,230 638 743 768 4,379 10,732 1,501 1,423 2,924 10,217 1,501 2,038 3,539 12,837 1,501 4,363 5,864 15,589 1,501 5,296 6,797 17,529 FY2012 1,586 2,801 595 4,982 2,430 Note: GBP = British pound sterling; FY = fiscal year Source: Jaguar Land Rover plc Annual Report 2013/14, p. 104, www.jaguarlandrover.com/media/23108/annual-report2014.pdd; FY2015, Q3 Interim (unaudited) accounts, p. 8, www.jaguarlandrover.com/media/59285/fy15-q3-ifrs-interimaccounts-final.pdf, both accessed March 13, 2015. 1. Explain the factors which might have JLR to 2. raise new debt at less than half the coupon rate of interest in 2015, compared with the debt raised in 2011. 3. Compute the amount at which existing bondholders might be willing to surrender their holdings. 4. Assuming JLR purchased all existing outstanding bonds at the price worked out in Q2; work out the incremental cash flows of this bond issue vis-a-vis the original issue. Does this financing strategy result in a cost savings for JLR? (i.e., is it a positive NPV project?) 5. What other benefits, if any, might accrue to JLR as a result of this financing strategy? Does this strategy add value to the firm? (Are there any strategic options?) To the existing bondholders? To JLR's equity-holders? Page 85: Problem 3-12 (Mini-Case) Problem 3-12 Mini-Case C G A P © Betty Simkins, Williams Companies Professor of Business and Professor of Finance, Oklahoma State University. All Rights Reserved. Reprinted with permission. ConocoPhillips’s (COP) Natural Gas and Gas Products Department (NG&GP) manages all of the company’s activities relating to the gathering, purchasing, processing, and sale of natural gas and gas liquids. Chris Simpkins, a recent graduate, was recently hired as a financial analyst to support the NG&GP department. One of Chris’s first assignments was to review the projections for a proposed gas purchase project that were made by one of the firm’s field engineers. The cash flow projections for the ten-year project are found in Exhibit P3-12.1 and are based on the following assumptions and projections: • The investment required for the project consists of two components: First, there is the cost to lay the natural gas pipeline of $1,200,000. The project is expected to have a ten-year life and is depreciated over seven years using a seven-year modified accelerated cost recovery system (MACRS). Second, the project will require a $145,000 increase in net working capital that is assumed to be recovered at the termination of the project. (Modified accelerated cost recovery system (MACRS) uses a shorter depreciable life for assets, thus giving businesses larger tax deductions and cash flows in the earlier years of the project life relative to those of straight-line depreciation.) • The well is expected to produce 900,000 cubic feet (900 MCF) per day of natural gas during year 1 and then decline over the remaining nine-year period (365 operating days per year). The natural gas production is expected to decline at a rate of 20% per year after year 1. • In addition to the initial expenditures for the pipeline and additional working capital, two more sets of expenses will be incurred. First, a fee consisting of 50% of the wellhead natural gas market price must be paid to the producer. In other words, if the wellhead market price is $6.00 per MCF, 50% (or $3.00 per MCF) is paid to the producer. Second, gas processing and compression costs of $0.65 per MCF will be incurred. • There is no salvage value for the equipment at the end of the natural gas lease. The natural gas price at the wellhead is currently $6.00 per MCF. • The cost of capital for this project is 15%. Answer the following questions. a. What are the NPV and IRR for the proposed project, based on the forecasts made above? Should Chris recommend that the project be undertaken? Explain your answer. What reservations, if any, should Chris have about recommending the project to his boss? b. Perform a sensitivity analysis of the proposed project to determine the impact on NPV and IRR for each of the following scenarios: 1. Best case: a natural gas price of $8.00 and a year 1 production rate of 1,200 MCF per day that declines by 20% per year after that. 2. Most likely case: Natural gas price of $6.00 and year 1 production rate of 900 MCF per day that declines by 20% per year after that. 3. Worst case: Natural gas price of $3.00 and year 1 production rate of 700 MCF per day that declines by 20% per year after that. C. Do breakeven sensitivity analysis to find each of the following: 1. Breakeven Natural gas price for a NPV =0. 2. Breakeven Natural gas volume in year 1 for a NPV =0. 3. Breakeven investment for a NPV = 0 d. Given the results in your risk analysis in parts b and c, would you recommend your answer? Explain. 
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