Ford Motors Value Enhancement Plan Case Study: Financial Analysis

The case study analyzes Ford Motor's Value Enhancement Plan (VEP), launched in 2000, focusing on its financial implications and strategic decisions. Ford, with substantial cash reserves, offered shareholders options including cash payouts and new shares. The study evaluates the significance of the ...Read More

Case Study

Table of Contents
INTRODUCTION...........................................................................................................................1
TASK...............................................................................................................................................1
Should Ford motors go with VEP:..............................................................................................1
CONCLUSION................................................................................................................................8
REFERENCES................................................................................................................................9

INTRODUCTION
Ford Motor firm was founded in 1903 which is ultimately indulge in the automotive
industry and Henry Ford in Dearborn, Michigan. The company is the second automotive
company in the world which provides highest employment to the nations which in turn achieve
its social objectives and business objectives. In 1908, the ford company bring out Model T that
was succeed drastically. Afterwords, company decided to provides innovative automotive
vehicle which in turn provides optimum results to the firm. However, this can be said the
company largely have their own voting power in terms of decisions. That is the reason, they
adopt the Value Enhancement Plan in order to provides better platform to their shareholders
(Lorenzen, Leber and Blankenship, 2010). The cited company have enough cash which is
utilised by the firm to implement VEP in an effective manner.
TASK
Ford motors go with VEP:
Ford value Enhancement plan is launched in April 2000, under this they have declared a
shareholders VEP to take advantage of the firms ownership structure. The ford motors had
accumulated $23 billion cash reserves and under the VEP, it would providing a sufficient amount
of return as %10 billion of cash to its shareholders. In respect to each share which are present
held by family member of ford motors. The plan is providing stockholders a new option of
getting %20 in respect to either cash or additional new common shares of ford motors.
According to the mention case study, it has been analyse that value enhancement plan(VEP) is
made for the purpose of attaining aims to align the interest of different shareholders through
offering them various option (Falagario and et.al., 2012). Such as:
 The choice of $20 in cash
 Additional new common shares or combination of cash
 Offering new share
Based on the following evaluation, Ford motors should go ahead with the current Value
Enhancement plan. There are necessary significance of VEP, as it has the feature of stock spilt
and share repurchase options. The price of ford's stock is reduced by $20 which provide the
actual cost in present time is about $26. The plan is just a kind of situation of stock repurchase
since, the amount of $1000 share shown to the investor is at the expenditure of reducing certain
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holding rights that can be attain by applying common repurchase plan. This may consists of
voting right options of ford in which 6% to 5% is termed as the important rate they are getting
for expenses to individual investors.
A uniform tax treatment for all the shareholder is announced by the company by using
repurchase or a dividend options. Likewise, it has been assumed that the payout remain constant.
There are always a perfect respectable disparities in receiving positive return to the investors by
the ways of issuing securities taxation system. Thus, that is the intention of ford motors, the
market can react adversely to the VEP in longer period of time, if operating performances drop.
The voting in favour or against the VEP of the concern company (Larson and Gray, 2013). It
cannot be advisable for the company to go ahead with the Value enhancement plan as decided by
the company.
Some other aspects are related with investors those have a preferred cash in getting more
amount of shares. Then a simple small stock split announcement can be more enough instead of
formulating an intricate and complex form of payout. As per the yield generated by company
$57.748 shares that provided a total of 37 shares. They can also attain advantages from the facts
that capital gains tax can be deferred by a delayed sales of total shares. As per the mention case,
their voting rights can be maintained at 40% in accordance of total stake being diluted to 3. As,
an investor they need to decide a perfect option of shares over total cash exempted from tax. The
Value enhancement plan under this, a taken as blueprint of stock split. The connection of
managerial performances with relation to share price of the company. It influence managers to
take appropriate decision regarding allocation of stock prices to be kept at maximum level.
a. Ford family member holding Class B shares
According to the situation, shareholder would have option to exchange their current stock
and class B share, one for one ford new common share and new class B share. If family sells too
many shares of its class B stock, in paying for estate taxes, to cover personal expenses. If the
family holding fall to between 33.7 million and 60.7 million share of Class B stock. The family
held only 30% of voting right. If class B shares are sold in outside the family they can revert it to
common stock.
b. An institutional investor, such as TIAA-Cref or the Calpers
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With the corporation of ideal of a one share, one vote shareholder, company is having
sufficient amount of option as dual class stock with various voting rights. As per the ford motor
company is between latter and has currently annoyed shareholder person with a capital
restructuring strategies that can help them to maximise the voting powers of the ruling class
people. Shareholder were offered option to select either new shares or combination of new shares
with total cash distribution of up to $10billion.
c. A regular outside shareholder:
The purpose is to make maximum and extra profit and they would not be affected by the
voting right. This persons would have option to choose cash option, because as per them ford has
very minimum level of growth opportunities to expand their business and it cannot search a
perfect project that are more effective and profitable. Thus, through getting money back one can
make use of it in more efficient manner as per their own requirements.
Like for examples, the connection with the selling of common stock with that to class B
shareholder. It maybe provide maximum profit in long time in the stock market. It can be
detected as a point of accommodation with corporate governance techniques of ford. However,
with decrease of 43% a number of decision cannot be salutary for the cited company in the
longer period of companies performance and growth. The VEP is effectively complicated and
has a variety of proposition offer to every types of investors in relation of tax liabilities ( Grover
and Kohli, 2012). The above evaluation point out that the VEP is a known as modified stock
dividend as the total number of shares has increase by 1. Earlier, capital gain and future aspects
of payout are taken into considerations. Likewise, there are multiple options available with Ford
motors as having more than 50 shares rights. The difference in taxation is determine as short-
term scheme for the company. It would get not enough amount of shares. The dividend per share
was $2 providing them with $100 as dividend amounts. If it has been calculated to have a
dividend of 100/87=$1.
If there is an investors which is having 50 shares of ford at initial level and they decided to have
plenty of option for taking extra shares.
After making analysis of value enhancement plan in well organise manner the rate at
which they can offers share is about 8.6 and for this they are charging a price about of 55%.
hence, this is attributed to the various factors which is having multiple impacts over the
performance of the company in the light of this particular plan.
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 Investment in financial commodities is another best option for the company. As the
shareholder interest and spend maximum of their times to purchase stock back. If the
shareholder doesn't wants to given up their shares, it will make the company to increase
the share price of stock.
 Merger and acquisition of the company is difficult to choose suitable option in very small
time period.
Problems in designing VEP:
 Ford's stock price is shown as undervalued as its stock price which is always, categories
below in Auto mobile sector index. The ford plays a crucial role in the auto mobile
sectors. Their its stock valuation can be improvise by using VEP (Chen and et.al., 2010).
 It is mostly depend upon the stockholders liquidity position that whether they have more
cash on hand by using recapitalisation. However, there are plenty of outstanding shares in
the current market position.
Benefits of VEP:
There are necessary advantages of using value enhancement plan. Some of them are
crucial for the company as well as shareholder. Like
 It help to provide value, flexibility and alignment to stockholder of ford company. Tie
ford administration is even more closer to the interest of stockholders.
 The recapitalisation is representing its cash reserve and flows generating propensity is not
so adequately represent its stock price.
 Because of Visteon Spin-off is allow the company to focus on its core businesses and
provide visteon a great option to develop its customers base outside ford motors (Young,
2010).
Shareholder point of view:
As a shareholder perception not including the family member of the company, we will
oppose the Value enhancement plan. It is unfair calculation that the family can maintain their
original voting control with less equity portion. As, it has been analyse that ford motors is having
wide amount of cash with the earning share of 5.86 and stock price of $51.38. few ford
shareholder were critical regarding the structure of transaction. In accordance with that the ford
family would be able to maintain its 40% voting powers with just 3.6% of total equity. It is
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fundamental at odds with relation to one share, one vote concept that combines perhaps
individual most critical aspects of positive corporate governance.
Completion of recapitalisation will set an ominous precedents for company to engage in
common framing with going to forward option. In this case allows family to reduce the equity
portion without providing any voting control. Setting of this particular option will clearly
unfriendly to interest of shareholder and disclose public to risk of regulating dilution of their
voting right in coming future.
It has been also help them to categorise the management decision to separate current
transaction from a stock dividend. For class B shareholder, it will be the fact of attaining
common stock in recapitalisation in violation of principles certificate's order in relation to paying
stock dividend on Class B. They believe that specific shareholder would have minimum right to
individual reject transaction that come out in insurance of common Ford family. In order to avoid
VEP's diluted effects, ford motors need to have primary averred goal of namely enhancement of
value. Consecutive stock repurchase declaration of dividend, for instant, would have satisfied
number of investors and have effective confident market.
In many ways, it is an effective option for both the company as well as shareholder to pay
and attain a stock dividend at the closing of financial year. Such types of dividends is as positive
as cash, with the included advantages that no taxes have to be levied at the time receiving the
same (Blue and et.al., 2010).
Companies that pay stock dividends are providing their shareholders the option of
keeping their earning or making it into the cash whenever, they so desire. It is seems to be the
best option for the company because they are termed as win- win situations that has sufficient
amount of potentials to make profitable the shareholders. It has been notified that option of stock
dividends are more better than cash because they do not have the unpredictable nature of market
trends. One of the perfect option of providing stock dividend instead of cash can be that which is
related with psychological connection with the company's extra shares.
Ford company is the second largest automotive company which is the cash rich and able
to implement its $10billion to successfully implement its VEP. That is why, Ford motor
introduce key shareholder value actions. These are:
 Values Enhancement Plan, covering $20 Cash per share or an extra stock.
 Wholly distribution of Visteon unit shares to Ford Shareholders.
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 Enhancing casting operations Partnership to enhance attention and pose growth.
The BODs of cited company permits three crucial actions in order to transform firm into
consumer oriented business and soundly rewards shareholders:
 A VEP which offers Ford shareholders new Ford Shares plus either $20 Cash per shares
or half of the new shares value;
 An independence plan for Visteon unit, the firm's $19 billion motor factors and systems
subsidiary, whereby Ford shareholders would get 100% of Visteon shares.
Such kind of innovative VEP demonstrates management confidence in the outlook for its
operations and an absolute commitment to rewarding our shareholders (Khodaei, Shahidehpour
and Kamalinia, 2010). The Ford company will go with the Value enhancement plan. Because,
this option possess both options such as cash and the issuance of new shares which makes the
firm's operations sound and makes an excellence option for the Ford company. The cash choice
resolves the challenges of Ford company which possess crucial amount of additional cash, as the
firm does not have the intensive amount of cash for paying their shareholders in the from of cash.
Henceforth, they distributes the cash on a proportionate basis. However, cited company have no
profitable tasks, that is why, company returns the excess cash to the stockholders which in turn
permits them to frame profitable investments. This is totally different form cash dividend, as the
returned cash would taxed in the form of tax and the capital gain and that is why firm attain the
tax efficiency for the shareholders. With the help of firm's point of view, they can lower the
dividend payment as there would be an enhance in the sustainable development.
However, this refers Ford will not have an opportunities to enhance the percentage of shares they
possess and handle voting right. In addition to this, such kind of option does not permits
shareholders to cash out and get the capital gain. Such would be taxed at a greater rate if getting
cash from VEP. Henceforth, Based on the Ford long term objectives, the the top level authority
should not issue cash dividend.
VEP main function
The value enhancement plan introduced by Ford includes two things which are stock
repurchase and stock exchange. This plan of company provides the option to the existing share
holders to swap their shares with the new shares of company (Grosu and Weber, 2010). If the
shareholders of company not swap the shares then they entitled to receive the cash with rate of
$20 per share. If some shareholders doesn't adopt any option then it is assumed that they entitled
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to get cash. If the cash option given by company is oversubscribed from $10 billion then the
amount is distributed among them on pro data basis. The dividend on the new shares is given at
reduced rate. Another option given by company is that the shareholders receive combination of
cash and stock of $20.
Due to the VEP, firm shareholders would exchange their existing common and Class B shares
for new shares. Apart from this, shareholders have the right to get either $20 per share or half of
the shares of company's new shares. But, for VEP, cash distribution is limited to only $10
billion.
Most essentially, the main proposed plan would enable the firm's shareholders to enhance
their equity in the firm by choosing to get extra Ford existing shares. This is forecasted that Ford
Motor management would opt VEP tool in order to provide sustainability. As VEP is shareholder
friendly as this offers to entire shareholders a choice of cash or enhanced ownership
(Chansareewittaya and Jirapong, 2010).
The Ford Automotive plans to adjust its dividends so that those shareholders who select
to get the stock rather than cash, would ultimately get similar amount of annual dividends.
However, VEP can only exercised after taking approval from Securities and Exchange
Commission and also the approval of shareholders.
The company's management needs to opt certain strategies in order to implement VEP activity in
the firm. However, there is a need to make certain strategies that could assist the firm in order to
make business operations effective and efficient.
Options for distributing the cash
The options avialable to distribute the cash is VEP and another option available to them
is share repurchase. But the company is don't want to choose this option because they already
have 40% stock of class B shares and if they entitled this option it reduces the voting power of
family to 30 % . This helps the family members to retain the 10 million shares for liquidity
purpose without disturbing the holding of class B shares.
Another option is value enhancement plan, in which dividend is paid at reduced rate as
they already have the limit of $10 billion to distribute in form of cash (Stone, Vargo and Habeeb,
2012).
Convene a share repurchase:
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Option of the Ford motor is to convene a share repurchase poses few advantages to the
firm, although, the downsides to this approach far outweigh advantages. Such option enables the
firm to get rid of their extra cash and dilutes equity but this introduce challenges to the firm
objectives (Snyder, 2014). The ford family does not wants to buy their shares as this will reduce
in the amount of equity they hold in the firm. Furthermore, the firm's shareholders are not able to
enhance their position in the firm. That is the main reason Ford does not wants to exercise this
option.
Visteon Independence:
Ford company strategy is to spin off its one of the unit which is implemented in order to
make sustainability in both of the operations that would ultimately assist the firm to get
independence goals. The ford company would distribute its total interest of Visteon to the
company's common and class B shareholders. The shareholders would get the shares of the
Visteon stock which would totally based on the number of Ford shares they earlier possessed.
However, the distribution ratio would declared after the record date. But these all execution are
implemented after taking permission from the Securities and exchange commission.
Calculation of WACC of Ford Motor
Cost of Equity = Risk free rate + Beta * Risk Premium = 5.79% + 0.81( 8-6.05%)=7.36%
Market Value of Equity = $78,254Million
Equity/(Debt+Equity ) = 20,644/(20,644+129,697)= 13.73%
Debt
After-tax Cost of debt =7.35% (1-t)
= 7.35%(1-.34)=4.75%
Market Value of Debt = $129,697Million
Debt/(Debt +Equity) = 100-13.73=86.26%
Cost of Capital = 7.36%(.1373)+4.75%(.8626) =(0.0101+0.0409)*100=5.10%
Interpretation:
From the financial statements of ford motors, various calculation is being done. These are
necessary for the company to make valuable decision regarding VEP. As cost of equity is 7.36%,
it represent risk which is associated with the total investment. At that time market value of debt
is $123,697 million during with debt ratio of 86.23%. It is more than the expectation of the
company. It must be control so that changes of getting maximum profit can be increased. From
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the cost of capital which is 5.10% of return is providing to the company by investing the same
amount of capital into multiple investment with having equal risk.
CONCLUSION
From the above given text this has been summarized that there are different options
which are available with the organization in order to increase the total efficiency of Ford motors.
VEP is an effective tool trough which enhancement in stock value of refereed organization can
be done by taking corrective decisions. As a share holder management has to take crucial
judgements in which these tools can be implemented and required results can be achieved. It is
also evaluated in the above text that being a shareholder what all choices need to be made with
the given options so that profitability of the firm is enhanced.
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REFERENCES
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