Ford Motor Company Case
Ford Motor Company Case
1. Does Ford have too much cash?
2. How does VEP work?
3. What are the alternatives for distributing cash?
4. What problems is the VEP plan designed to solve?
5. As a shareholder, how would you approve the VEP? Would you elect cash or stock?
Q.1) Does Ford have too much cash?
Exhibit 6, 8, and 9 (figures in $ millions) provides selected balance sheet items for Ford, General Motors, and DaimlerChrylser. The given information indicates that Ford carries the highest amount of cash and marketable securities among the three companies. In 1999, Ford had $25,173 of cash and marketable securities while General Motors and Daimler-Chrylser have only $12,140 and $9,163. Comparing at an industry level, we as a team inferred that Ford may be carrying too much cash.
Ford competes in an industry that is notoriously sensitive to the economic cycle, and generally companies in cyclical industries have to keep cash in reserve to cover up for cyclical downturns. However, high amount of cash in the balance sheet does not necessary signal that a company’s future earnings has a high potential of growth. A company sitting on cash tends to lose the opportunity to gain high returns generated from expanding business or investing in new projects. Keeping excess cash in the bank would be a mistake when the company could use the cash to earn a higher return than the company’s cost of capital.
It is important to note that although Ford holds the highest amount of cash, both Ford’s earnings per share of 5.86 and stock price of $51.38 are lower than General Motors and DaimlerChrysler in 1999. Ford’s higher debt to equity ratio during this period may be the reason that caused the company’s cost of capital to increase and eventually decreasing the stock price.
Q.2) How does VEP work?
The main function of the Value Enhancement Plan (VEP) consists of both the options of stock repurchase and a stock exchange.Through this plan, shareholders would
1. Does Ford have too much cash?
2. How does VEP work?
3. What are the alternatives for distributing cash?
4. What problems is the VEP plan designed to solve?
5. As a shareholder, how would you approve the VEP? Would you elect cash or stock?
Q.1) Does Ford have too much cash?
Exhibit 6, 8, and 9 (figures in $ millions) provides selected balance sheet items for Ford, General Motors, and DaimlerChrylser. The given information indicates that Ford carries the highest amount of cash and marketable securities among the three companies. In 1999, Ford had $25,173 of cash and marketable securities while General Motors and Daimler-Chrylser have only $12,140 and $9,163. Comparing at an industry level, we as a team inferred that Ford may be carrying too much cash.
Ford competes in an industry that is notoriously sensitive to the economic cycle, and generally companies in cyclical industries have to keep cash in reserve to cover up for cyclical downturns. However, high amount of cash in the balance sheet does not necessary signal that a company’s future earnings has a high potential of growth. A company sitting on cash tends to lose the opportunity to gain high returns generated from expanding business or investing in new projects. Keeping excess cash in the bank would be a mistake when the company could use the cash to earn a higher return than the company’s cost of capital.
It is important to note that although Ford holds the highest amount of cash, both Ford’s earnings per share of 5.86 and stock price of $51.38 are lower than General Motors and DaimlerChrysler in 1999. Ford’s higher debt to equity ratio during this period may be the reason that caused the company’s cost of capital to increase and eventually decreasing the stock price.
Q.2) How does VEP work?
The main function of the Value Enhancement Plan (VEP) consists of both the options of stock repurchase and a stock exchange.Through this plan, shareholders would