1. Should Ford:
Please justify your response.
2. If the VEP plan is implemented, what would be your choice (cash or shares or a combination) if you were one of the following, and why:
3. Using the beta information in Exhibit 10, the balance sheet information in Exhibits 6 to 9, and, if needed, information from publicly available sources, calculate the WACC in 1999 for Ford, DaimlerChrysler and General Motors. Justify your calculations.Please complete the arguments for your answers using all relevant insights, including from the lectures, from the course textbook, and from any literature those sources cite.
The case explains that the value enhancement plan of the Ford Motors explains that the company has made a great reserve worth $ 23 billion in cash. The reserve explains about the largest cash reserve of the company. On the basis of this reserve maintained by the company, ford Motors Company has planned to offer around $ 10 billion amount as cash dividend to the shareholders of the company. The company has also planned that in exchange, company would ask the shareholders to take new shares of the company or the $ 20 and the new share of the company. The company has basically planned to buy back the shares and issues new shares in the market of different amount.
On the basis of the study on financial and non financial performance of Ford Motors limited, it has been evaluated that if the value enhancement plans would be accepted by the company then:
On the basis of the above evaluation and the study, it has been recognized that if the company would implement the VEP plan than it may impact on the financial performance and the market position of the company negatively. It could lead to the shareholders of the company towards the de-motivation.
Thus, it is recommended to the top level management and the chief financial officer to not to implement the VEP plan and must make few changes into the plan which would impact on the performance and the shareholders of the company positively (Elton et al, 2009). It leads to the outcome that the company should not go ahead with this plan.
Further, if the company will not go for the VEP plan than the company would left with huge reserves and the cash amount. The case explains that the stock price of the company was not better in last year. The stockholders of the company had started losing their interest in the stock price of the company because of lesser dividend amount and no significant plans and policies for the stockholders of the company. And the currently the company is planning for the VEP rather than issuing the cash dividend to the shareholders of the company or buy back the entire shares of the company.
The case of ford motors explains that if in this position company would offer the entire reserve amount as cash dividend amount to the shareholders of the company than the shareholders of the company would feel motivated and this process would enhance the market position of the company. It explains that the company should go for issuing the cash dividend to the shareholders of the company (Baker and Nofsinger, 2010).
The company was following the irrelevant dividend policy which explains that the dividend amount should not be given to the shareholders of the company and must be retained by the company for the future investment and projects of the company. This policy has demotivated the stockholders of the company (Kruth, 2013). And now if the Ford Motors would offer great dividend amount to the shareholders of the company than the investors would feel motivated and with the help of it, the share price and market position of the company would be improved again in the market.
In addition, the study has been done on the buy back of the shares of ford Motors. The VEP plan of the company explains that it is not reasonable and if the does not follow the VEP plan than the company holds the entire reserve amount. The case explains that the market position has been worst in last year. And it leads to the stockholders of the company towards lesser interest in the stock of the company (Peterson and Fabozzi, 2002). The stock performance and the market position of the company have been worst because of irrelevant dividend policy of the company.
It has been found that one of the traditional and most used techniques of the companies to manage the performance at market of the company is buy back the shares. If the company would buy back the shares from the market than the number of stock would be lesser in the market and it would directly lead to the company towards the better position of the company (Krantz, 2016).
The case of ford motors explains that if in this position company would spend the entire reserve amount to buy back the shares of the company than the shareholders of the company would feel motivated and explains that the investment into the Ford Motors limited is of worth. And the process of buy back the stock of the company would improve the market position of the company. It explains that the company should go for buy back the shares of the company.
If the company would buy back the shares from the security market than the cost of capital of the company would be reduced as well as the capital structure of the company would be optimal. It explains that the company should buy back the shares.
Further, the case explains that if the VEP plan is implemented by the company in the business than there would be two options in front of the shareholders of the company. The first option is to accept the proposal of the company and take the cash from the company and the other option is take the shares from the company and third option is to take cash as well as the shares of the company.
The VEP plan explains that if the company has planned to buy back all the shares from the market. The company has offered three options to the shareholders of the company which are as follows:
The VEP plan of the company explains that in exchange, company would ask the shareholders to take new shares of the company or the $ 20 and the new share of the company. The company has basically planned to buy back the shares and issues new shares in the market of different amount so that, the reserves of the company could be maintained at a proper place (Phillips and Stawarski, 2016).
The different options of VEP plan of ford motors and the different shareholders of the company has been studied and it has been found that the reaction and the decision of each shareholder would be different for the new VEP plan of the company.
If the shareholder of the company is from Ford family and owning the shares of B class than the shareholders should go for exchange the old share of the company to the new shares as it would maintain the voting rights and the performance of the company.
Class B shares are special category of the share which offers the special voting rights to the owner of the shares. It explains that till the time, stock is holding by any of the ford members, they have 40% voting rights and if the new plan of VEP would be implemented than the total shares of the company would be worthless. However, the VEP plan explains that the ford family members would be able to exchange the one Class B stock in one common stock and one new class b stock with the same power (Palicka, 2011).
The shareholders (Ford family members) would have special right in the company. If the return part is considered than the dividend of class B shares are equal to the normal shares of the company. It mainly focuses on the special powers and the rights of the company.
The VEP plan explains that the class and the category of the shares of the company would be treated as old time even the new plan would enhance the powers and the rights of the family members in the company. So, it is recommended to the ford family members of the company is choose the share exchange options from the above.
And if the stock price of the company gets down $ 33.7 than they must chose the option of exchange the old shares with the new shares so that the owner’s rights of the family members could be maintained and they could make the decisions about the internal and external operations of the company (Schlichting, 2013).
Further, if the shareholder of the company is an institutional investor and owning the shares of TIAA-Cref or the Caplers than the shareholders should go for cash dividend option as the case and the proxy statement filed for the TIAA-Cref and Caplers explains that the VEP plan is specially planned to improve the rights and the power of family members of the Ford.
If this plan would be implemented in the market than the entire operations of the company would be in the hand of the family members of the company and in that case, even the institutional investors would also not be able to interfere in the financial and non financial position and the performance of the company (Ross, Westerfield and Jaffe, 2007).
The stockholder who are holding the TIAA-Cref or the Caplers shares in current scenario could place their opinion in the meetings of the company as well as their returns and their power are also higher in the market. It explains that till the time, stock is holding by any institutional investors, than they have all the rights to interfere in the internal and external operations and the activities of the company.
However, if the VEP plan is implemented than the shareholders (institutional shareholders) would have normal right in the company. If the return part is considered than the dividend of TIAA-Cref or the Caplers shares are equal to the normal shares of the company. It mainly focuses on the special powers and the rights of the company.
The VEP plan explains that no matter what the class and the category of the shares of the company, each share would be treated as same. So, it is recommended to the institutional shareholders of the company to take the option number 1 of the company which explains that the shares of the company must be sold to the company against the cash dividend (Seitzinger et al, 2010).
And if the ford motors make any changes into the VEP plan, which would not only improve the power and position of ford family members but also focus on the position of TIAA-Cref or the Caplers holders, than the investors must make the changes into the decision and then it must go for the third option which explains about both cash and the new shares of the company.
Lastly, it has been recognized that, if the shareholder of the company is an outsider shareholder and owning the normal share of the company than the shareholders should go for third option as the VEP plan is specially planned by the comapny to enhance the market position of the company and enhance the market position of the company and the stock of the company.
If this plan would be implemented in the market than the entire operations of the company would be almost similar as earlier. The main decisions would be taken by the family of Ford motors, institutional investors and the big investors of the company. As well as, the company would announce and will provide the revenue to the shareholders on time.
However, it has been found that the stock price of the company would be improved in the market as well as the company would offer huge dividend to the shareholders of the company. The stockholder who is holding the ordinary shares in current scenario would be able to enjoy the great returns from the stock of Ford Motors.
In addition, if the VEP plan is implemented than the ordinary shareholders would have normal right in the company as well as their revenue from the shares of the company would be improved (Ward, 2012). If the return part is considered than the dividend of the shareholders would also be higher.
The VEP plan explains that the ordinary shareholders of the company must go for the third option of the company which explains that the shares of the company must be sold to the company against the cash dividend as well as new stock of the company.
On the basis of the study on VEP plan, it has been evaluated that the new plan is quite complicated and the difference outcome would be got from the shareholders of the company. Further, WACC of the company has been calculated in concern with the main competitors of the company which are General motors and Daimpler Chrysler (Zimmerman and Yahya-Zadeh, 2011). The WACC calculation and analysis of all the three companies are as follows:
Firstly, the Ford Motors has been evaluated and it has been found that the total debt and equity of the company is $ 1,52,603 and $ 64,379 in 1999. Further, it has been found that the debt amount has been raised by the company in exchange of 8.3% interest to the debt holders of the company. And the case explains that the taxation rate was 33.7% in 1999.
Thus, the cost of debt of the company is 5.5% (Weston and Brigham, 2015). Further, it has been found that the risk free rate of market is 5.79% and market premium and beta of the company is 12.68% and 0.81 which explains that the cost of equity of the company is 11.37%. The total debt and equity of the company against the total capital of the company is 70.26% and 29.74%. It explains that the WACC of the company is 11.37% (Weaver, Weston and Weaver, 2001).
It explains that the company has not followed a proper structure of optimal capital structure however the cost of the company is quite average.
Further, the general Motors have been evaluated and it has been found that the total debt and equity of the company is $ 1,31,688 and $ 45,024 in 1999. Further, it has been found that the debt amount has been raised by the company in exchange of 10.8% interest to the debt holders of the company. And the case explains that the taxation rate was 27.1% in 1999.
Thus, the cost of debt of the company is 7.87% (Tian & Jiang, 2015). Further, it has been found that the risk free rate of market is 5.79% and market premium and beta of the company is 12.68% and 0.93 which explains that the cost of equity of the company is 12.2% (Reilly and Brown, 2011). The total debt and equity of the company against the total capital of the company is 74.52% and 12.20%. It explains that the WACC of the company is 8.97%.
It explains that the company has not followed a proper structure of optimal capital structure and, the cost of the company is quite higher than the other competitors of the company.
Lastly, the WACC study has been done on the company to measure the competitive position and the performance of ford motors. On the basis of the balance sheet of the company, it has been found that the total debt and equity of the company is $ 92,110 and $ 78,254 in 1999. Further, it has been found that the debt amount has been raised by the company in exchange of 6.9% interest to the debt holders of the company. And the case explains that the taxation rate was 41% in 1999.
Thus, the cost of debt of the company is 4.07%. Further, it has been found that the risk free rate of market is 5.79% and market premium and beta of the company is 12.68% and 0.80 which explains that the cost of equity of the company is 11.30% (Radebaugh, Gray and Black, 2006). the total debt and equity of the company against the total capital of the company is 54.07% and 45.93%. It explains that the WACC of the company is 11.30%.
It explains that the company has followed a proper structure of optimal capital structure. However, the cost of the company is quite higher than the other competitors of the company.
References:
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