Ford Motor Company Case Essay

cut across Motor Company Case1. Does crossing save too untold specie?2. How does VEP work?3. What are the alternatives for distri anding property?4. What problems is the VEP plan knowing to solve?5. As a shareholder, how would you approve the VEP? Would you elect(ip) cash in or blood? Q.1) Does crossroad consider too much cash?Exhibit 6, 8, and 9 (figures in $ millions) provides selected balance flat solid items for Ford, prevalent Motors, and DaimlerChrylser. The given information indicates that Ford carries the highest amount of cash and marketable securities among the tierce 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 nonoriously sensitive to the economic cycle, and gener anyy companies in cyclical industries have to keep cash in reserve to coer up for cyclical downturns. However, high amount of cash in the balance sheet does non necessary signal that a companys upcoming earnings has a high potential of growth. A company sit on cash tends to lose the opportunity to gain high returns generated from expanding championship or investing in wise projects. Keeping excess cash in the bank would be a mistake when the company could practice session the cash to earn a higher return than the companys bell of capital.It is important to none that although Ford holds the highest amount of cash, twain Fords earnings per share of 5.86 and shopworn price of $51.38 are decline than General Motors and DaimlerChrysler in 1999. Fords higher debt to equity proportion during this period may be the earth that caused the companys cost of capital to increase and eventually decreasing the stock price.Q.2) How does VEP work?The chief(prenominal) function of the Value Enhancement Plan (VEP) consists of both the options of stock buy and a stock exchange. Through this plan, shareholders would exchange their existing cat valium stock and assort B shares,one-for-one for new Ford common and new clear up B shares. Moreover, shareholders would receive either $20 per share in cash or the equivalent value in new Ford common shares fored on Fords price in July 2000. dowryholders who did not make 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 look atd pro rata to find out that the company distributed at most $10 million. Dividends on the new shares would be reduced such that shareholders who elected stock only would get the homogeneous dividend payment on their package as the quarterly $.50 per share soon being paid. A third option the company offers to the shareholders allows them to receive 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 conduct share buyback over paying dividends. But Ford preferred receiving cash dividends since that provided the family members with liquidity without having to dish out rank B shares and run the risk of diluting familys authorization. (Ford had 1.15billion common shares and 70.9million Class B shares outstanding. The family holded a 40% vote as farsighted as it owned 60.7 million shares. Reduction below 60.7million until 33.7million would reduce the familys voting 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 statistical 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 their holding of Class B shares. Pay Dividends UniformlyW.r.t. the Value Enhancement Plan, dividends on new shares would be reduced as there wa s a $10billion limit to distribute cash. Dividends with additive growth in value are absent. Ford wants to keep a large amount of cash to itself because of the uncertainty 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 unremarkable income rates whereas gains realized on shares that were repurchased received capital gains treatment. There were no cash deductions for the company in the above two methods. Hence both theprocedures were same for the company.4. What problem is the VEP plan designed to solve?The primary reason why Ford designed the VEP was that Ford believed its stock was undervalued and the undervalued stock was narrowing the companys ability to use its stock for acquisitions or to attract, retain or incentivize employees. Ford thought the VEP would enhance the value of its outstanding shares because the recapitalization provide highlight its cash reserves and cash flow gen erating capacity, and also indicates forethoughts confidence in the future of the business. In addition, Ford believed the adjustments in the employee incentive plans by the recapitalization go forth tie Ford managements compensation even more 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 core business but also give Visteon a chance to build its client base outside Ford. However, some analysts and shareholders (TIAA-Cref, Calpers) argued that the VEP was designed to avoid a risk that Ford could face 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 seems to be a darling idea return value to stockholders in the form of cash, without having to compromise control o ver 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 leadership 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 boffo would see the cash reserves of the company reduced by 10 billion, this drastic reduction in cash will send interracial 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 crown down or poor run of performance.Though flexibility and realignment is mentioned, that does not seem to be the case.The program only allows owners of both common shares and flesh B shares the opportunity to obtain liquiditywithout 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 need for liquidity to handle settlement of divorces and estate taxes). If the stock of Ford is perceived undervalued wherefore the advice would be for the shareholder to accept 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, rather the pros are stacked in choose 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 perceived to be undervalued.The End.