Ford Motor Company's Share Repurchase Policy Analysis
Added on 2020-10-22
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Corporate finance
Table of ContentsINTRODUCTION...........................................................................................................................1TASK ..............................................................................................................................................11. Suitable plan for Ford..............................................................................................................12. Individual investor preferences for VEP plan.........................................................................33. Calculation of WACC along with its justifications.................................................................44. Dividend policy followed by Ford Motor Company...............................................................6CONCLUSION................................................................................................................................8
INTRODUCTIONCorporate finance is the branch of an organisation which deals with finance andinvestment decisions. This concept is focused to prepare strategies which can be used in shortterm and long term financial planning. In this project report a case study on Ford is studiedconcerning Value enhancement plan. Ford Company is an American multinational auto makerwhich operates in several countries including France, USA and many more and has headquartersin Dearborn, Michigan. The primary aim of this project report is to develop an understandingtowards the implementation of VEP by Ford. Various alternative plans such as cash dividend andshare repurchase are discussed in this report in order to suggest suitable plan for Ford. Responsesof individual investors are analysed in this report along with justification of WACC. Importanceof dividend policy is described in order to identify rationale behind the policy which is used byFord (Brealey, 2012). TASK 1. Suitable plan for FordFord Motor Company deals in manufacturing cars and trucks and operates in multiplecountries. This organisation had adopted a Value Enhancement Plan in the year of 2000 whichhas a main aim of distributing company's accumulated cash reserves to their existingshareholders. Due to the option provided to shareholders of either receiving cash or cashequivalent common shares, has raised various issues regarding pro rata basis. In order to resolvetheir issues, Ford company is reconsidering their plan and evaluating different options which canbe selected by them. These three options are analysed below in order to suggest Ford the mostsuitable plan:VEP – The Value enhancement plan introduced by Ford was extremely complicated notonly for their shareholders but also for the company itself. According to VEP, Ford has proposedthat every shareholder will either receive 20 dollars against their per common share or willreceive equivalent valued stock but the problem arises when every shareholder preferred cashand not stocks then the company decided to adopt pro rata basis but that proposal was notfavourable for ample of members. The Complications in this plan begins with offering differenttype of tax liability to different members along with complex capital gains and future payoutmodels. This confusion can be described by an example, if a shareholder has 10 shares of ford1
and decides to opt for extra shares and not cash then they will have shares equivalent of 20dollars each share and according to the their share cost in 2000 that shareholder will have extraof 7 shares (Clark, Feiner and Viehs, 2015). This proposal has modified stock dividend due to which simple stock split have beenincreased by about 1.6. This plan is considered as to raise disparity among investors as accordingto VEP an investor can choose shares over cash which will help them by exempting them fromtax. Another problem in this proposal was that it leads to excessive voting rights. According tocompanies act, every share has one vote which can be used to cast the vote at the time of generalmeeting. This excess in the voting rights resultant in degrading managerial performance. Issue a cash dividend – This is a traditional method of distributing cash reserves to theshareholders. According to this method, cash dividend is the money which is paid to theshareholders as a part of profit against their investment in company' s stocks. This dividend is acompulsion over an organisation, they can distribute dividend whenever there is a excessive cashin their company reserves. These dividends can be paid monthly, quarterly or even yearly basis.The money is paid to shareholders is done on per share basis in order to ignore the partiality. Inthis case scenario, Ford auto mobile company could adapt this method in order to distribute theircash reserves. Benefits of this method is that there is simplicity in the operations unlike VEP andthere will be higher satisfaction amongst the shareholders. Ford could also gain huge brandequity by providing 20 dollars per share which is relatively higher than any other organisation. This method was not selected by this company because of the tax liability which wouldbe imposed on their shareholders. Cash dividend is a effective method but for Ford, this methodis not that beneficial as they contributing a lot against a share which would raise the problem ofexcessive tax liability (Coles, Lemmon and Meschke, 2012). Share repurchase – According to thismethod, an organisation buys back their ownshare from the market. This process is considered as ideal for the conditions where managementthinks that their shares are undervalued so reducing the number of shares can increase the valueof their shares. Company buys their stocks directly from from the market price at a fixed rate. Inthe case scenario of Ford company, the main intention of introducing value enhancement planwas to increase the value of their share and for that this method is considered as most significant.After analysing all the methods, this has been observed that Value enhancement plan hadvarious complexities due to which, company faced various issues. Share repurchase is a more2
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