Ford Motor Company
Ford Motor Company’s Value Enhancement
1. Does Ford have too much cash?
The amount of cash that Ford is carrying on its balance sheet is too much considering that additional money not used for the advancement of the company belongs to the owners of the firm, the shareholders. Having too much cash on its balance sheet will be a disincentive to Ford’s employees who consequently will feel not feel an urgency to perform and add value to the company. Notwithstanding the fact that the company is always on the lookout for acquisition targets even after already purchasing Jaguar Cars, Volvo Cars, and Land Rover in the past ten years, it is imperative that the company does not engage in such activities for the sole purpose of “empire building.” Rather, the company should only pursue those companies that will add value to the overall firm. By 2000, Ford extinguished all of their expanding opportunities. By calculating the WACC and subtracting the Interest Earned on their Cash Holdings, we as a group were able to calculate Ford’s Opportunity Cost of Capital. 11.5% - 4.79% = 6.71%. Thus, it is costing Ford 6.71% per annum to sit on this cash. On the other hand, the fact that Ford’s current, quick, & cash ratios from 1996-1999 are lower than the ratios for its competitors represents a concern in terms of Ford possibly having little wiggle room in relation to paying down its short term obligations. Ford having the higher debt to total asset ratio relative to GM over this period is another cause of unease as using too much debt to pay for its assets can raise the company’s cost of capital. However, fact that its leverage ratio is lower than GM over this four year period demonstrates the company’s solvency and high market capitalization. Using the full $10B to pay for the Value Enhancement Program as a result will decrease its liquidity further and is also a worry due to the cyclicality of the Auto Industry’s profits. Therefore, it is our recommendation that
1. Does Ford have too much cash?
The amount of cash that Ford is carrying on its balance sheet is too much considering that additional money not used for the advancement of the company belongs to the owners of the firm, the shareholders. Having too much cash on its balance sheet will be a disincentive to Ford’s employees who consequently will feel not feel an urgency to perform and add value to the company. Notwithstanding the fact that the company is always on the lookout for acquisition targets even after already purchasing Jaguar Cars, Volvo Cars, and Land Rover in the past ten years, it is imperative that the company does not engage in such activities for the sole purpose of “empire building.” Rather, the company should only pursue those companies that will add value to the overall firm. By 2000, Ford extinguished all of their expanding opportunities. By calculating the WACC and subtracting the Interest Earned on their Cash Holdings, we as a group were able to calculate Ford’s Opportunity Cost of Capital. 11.5% - 4.79% = 6.71%. Thus, it is costing Ford 6.71% per annum to sit on this cash. On the other hand, the fact that Ford’s current, quick, & cash ratios from 1996-1999 are lower than the ratios for its competitors represents a concern in terms of Ford possibly having little wiggle room in relation to paying down its short term obligations. Ford having the higher debt to total asset ratio relative to GM over this period is another cause of unease as using too much debt to pay for its assets can raise the company’s cost of capital. However, fact that its leverage ratio is lower than GM over this four year period demonstrates the company’s solvency and high market capitalization. Using the full $10B to pay for the Value Enhancement Program as a result will decrease its liquidity further and is also a worry due to the cyclicality of the Auto Industry’s profits. Therefore, it is our recommendation that