Ford Motor Company Case Essay

hybridizing repel Company Case1. Does cross gravel likewise a mature deal nones?2. How does VEP fetch?3. What are the alternatives for distributing capital in?4. What professionalblems is the VEP plan intentional to solve?5. As a circumstancesholder, how would you honor the VEP? Would you elect immediate payment or song? Q.1) Does ford prepare too much currency?Exhibit 6, 8, and 9 (figures in $ millions) provides selected balance cruise items for track, world(a) Motors, and DaimlerChrylser. The presumption information indicates that Ford carries the nobleest derive of funds and marketable securities among the three companies. In 1999, Ford had $25,173 of property and marketable securities while General Motors and Daimler-Chrylser maintain only $12,140 and $9,163. Comparing at an constancy level, we as a police squad inferred that Ford may be carrying too much funds.Ford competes in an industry that is notoriously sensitive to the economic cycle, and loosely companies in cyclical industries have to throw funds in reserve to viewing up for cyclical carry outturns. However, high amount of currency in the balance sheet does not necessary signal that a smart sets future wages has a high potential of growth. A company sitting on cash tends to lose the opportunity to gain high unsays generated from expanding business or investing in impudent 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 companys cost of capital.It is course of studyical to note that although Ford holds the highest amount of cash, two Fords earnings per portion out of 5.86 and downslope price of $51.38 are decline than General Motors and DaimlerChrysler in 1999. Fords higher debt to equity ratio during this finish may be the reason that caused the companys cost of capital to cast up and eventually decreasing the wrinkle price.Q.2) How does VEP bring in?The main functi on of the Value sweetener Plan (VEP) consists of both(prenominal) the options of argumentation repurchase and a hackneyed trade. Through this plan, shareholders would exchange their existing familiar standard and sectionalisation B shares, one-for-one for upstart Ford greensalty and new class B shares. More over, shareholders would perk either $20 per share in cash or the equivalent order in new Ford commonality shares based on Fords price in July 2000. pieceholders who did not serve an election would be treated as if they made a $20 all-cash election. Meanwhile, if the cash option was oversubscribed, the $20-per-share payment would be hand outd pro rata to ensure that the company distributed at about $10 billion. Dividends on the new shares would be surmountd such that shareholders who elected burgeon forth only would get the same dividend payment on their package as the every quarter $.50 per share currently being paid. A third option the company offers to the shareholders renounces them to procure a combination of cash and stock worth of $20.Q.3) What are the alternatives for distributing cash?Share Repurchase Institutional shareholders urged Ford to bear share repurchase over work dividends. But Ford preferred receiving cash dividends since that provided the family members with liquidity without having to sell manakin B shares and run the risk of diluting familys control. (Ford had 1.15billion common shares and 70.9million Class B shares outstanding. The family retained a 40% vote as tenacious as it owned 60.7 million shares. trim back below 60.7million until 33.7million would reduce the familys balloting power to 30%. Below 33.7% of Class B shares ownership, all privileges would be lost) Mr. Ford had said that the family had agreed to take its portion of the distribution in the form of new common shares, not cash. The family thus would have tens of millions of common shares to sell for liquidity purposes without reducing t heir holding of Class B shares. be Dividends UniformlyW.r.t. the Value Enhancement Plan, dividends on new shares would be lessen as there was a $10billion limit to distribute cash. Dividends with incremental growth in treasure are absent. Ford wants to keep a large amount of cash to itself because of the skepticism associated with the cash flow. It has the option to distribute the cash in the form of dividends. Shareholders were taxed on cash dividends at ordinary income rates whereas gains agnize on shares that were repurchased received capital gains treatment. at that place were no cash deductions for the company in the above two methods. Hence both the procedures were same for the company.4. What problem is the VEP plan knowing to solve?The primary reason why Ford designed the VEP was that Ford believed its stock was undervalued and the undervalued stock was limiting the companys ability to use its stock for acquisitions or to attract, retain or incentivize employees. Ford melodic theme the VEP would enhance the value of its outstanding shares because the recapitalization willing highlight its cash reserves and cash flow generating capacity, and also indicates counsellings confidence in the future of the business. In entree, Ford believed the adjustments in the employee incentive plans by the recapitalization will tie Ford managements compensation even much closely to the performance of its stock price. Additionally, as a part of VEP, Ford announced the Visteon spinoff was not only designed to allow Ford to focus on its incumbrance business but also give Visteon a chance to build its leaf node base outside Ford. However, some analysts and shareholders (TIAA-Cref, Calpers) argued that the VEP was designed to avoid a risk that Ford could slip due to a share buyback. Because a share repurchase would reduce its voting right in the company, the Ford family considered VEP as a suitable option.5. As a shareholder, how would you approve the VEP? Would you elect cash or stock? At face value the VEP gatherms to be a good idea return value to stockholders in the form of cash, without having to compromise control over the company. As is gleaned from the case, Ford has approximately 23 billion dollars in cash reserves with the proposed VEP set to return up to 10 billion USD back to shareholders. Executive leaders tout flexibility,liquidity and alignment as advantages of the proposed project, however, a couple of valid questions have been raised (two institutional investors in particular). The proposed VEP if successful would see the cash reserves of the company reduced by 10 billion, this drastic diminution in cash will trip out mixed signals to analysts and the market as a whole. It could be perceived as a ploy to return money to shareholders in anticipation of a wind down or poor run of performance.though flexibility and realignment is mentioned, that does not seem to be the case.The course of study only allows owners of both common shares and class B shares the opportunity to come up liquidity without having to lose control of their class B shares. The program will have the Ford family exchanging their common shares for the new stock in addition to the $20 or new stock options. This is particularly a welcome boon (as the case alludes to their fatality for liquidity to handle settlement of divorces and body politic taxes). If the stock of Ford is perceived undervalued thus the advice would be for the shareholder to deal the VEP as the share price increases in an addition to the opportunity to reinvest in the additional new common stocks. In conclusion we would not approve of the VEP as we believe the benefits of the program does not benefit all stockholders, earlier the pros are stacked in elevate of the Ford family. On the contrary a common stockholder will accept the VEP and accept cash payment if the stock was perceived to be overvalued and further stock options if the stock was percei ved to be undervalued.The stop.