General motors 1991 Equity financing
International Accounting Module: A, 2013
Presentation Memo
Name: Group 9, General Motors Case
!
General Motors (GM) is an American multinational car and truck manufacturer considered to be one of the 'Big 3’s ' in the automobile industry.
GM faced a financial crisis in 1990 due to overcapacities, rising oil prices and increasing competition. During the period of 1990-1992 GM suffered losses of over $4.5 Billion. Initial measures such as a cut in dividends, selling of assets and the closing of plants GM could reduce the re-financing amount to about $500-$750 Million.
GM
was now looking towards a viable method to raise the remaining amount.
Solutions
GM
had a choice between different long-‐term financing measures listed below.
Debt:
Debt is usually less expensive than equity funding, because the debt issuing bank has the right to seize the assets of the company in a case of bankruptcy. However, for GM this was not a viable option as rating agencies would downgrade their credit rating for the following reasons.
•
A new debt issue would not be received well by the market because it would increase the debt/equity ratio, which was already high:
1990
1989
1988
Total liabilities
71,209M
59,823M
55,261M
Equity
31,331M
36,633M
35,261M
2,3
1,6
Presentation Memo
Name: Group 9, General Motors Case
!
General Motors (GM) is an American multinational car and truck manufacturer considered to be one of the 'Big 3’s ' in the automobile industry.
GM faced a financial crisis in 1990 due to overcapacities, rising oil prices and increasing competition. During the period of 1990-1992 GM suffered losses of over $4.5 Billion. Initial measures such as a cut in dividends, selling of assets and the closing of plants GM could reduce the re-financing amount to about $500-$750 Million.
GM
was now looking towards a viable method to raise the remaining amount.
Solutions
GM
had a choice between different long-‐term financing measures listed below.
Debt:
Debt is usually less expensive than equity funding, because the debt issuing bank has the right to seize the assets of the company in a case of bankruptcy. However, for GM this was not a viable option as rating agencies would downgrade their credit rating for the following reasons.
•
A new debt issue would not be received well by the market because it would increase the debt/equity ratio, which was already high:
1990
1989
1988
Total liabilities
71,209M
59,823M
55,261M
Equity
31,331M
36,633M
35,261M
2,3
1,6