Case problem : Ford Motor Company’s Value Enhancement Plan Group 4 : Annie , Duong Boi Ngoc , Jussi , Michael
Q1. Does Ford have too much cash? Why did Ford choose to accumulate so much cash? And why is Ford distributing a large amount of cash now?
(1) To check whether Ford has too much cash, we have to calculate the cash ratio. But the data we have is not complete, we cannot find out that ratio. Instead, we calculate the cash turnover ratio to check whether Ford has excess cash. Cash turnover ratio = sales/ average cash, and the following is the ratio from different company
Cash turnover ratio
From above table, we can see Ford’s cash turnover ratio is lower than others, which means Ford has excess cash. (2) the reason to hold cash:
* Normally, they accumulate cash for the uncertainty associated with its cash flow. * Fulfill the ability to compensation.
* The economy cycle in 1999 to 2000 was quite well.
(3) Ford believes that its stock is undervalued, limiting, among other things, the Company’s ability to use its stock for acquisitions or to attract, retain or incentivize employees. Ford believes the recapitalization will highlight its cash reserves and cash flow generating capacity, which have not been adequately reflected its stock price. In addition, they want to fulfill the Ford family’s liquidity needs and also reduced the agency cost. Q2. How does the Value Enhancement Plan (VEP) really work? Are there alternatives for distributing cash? (1) Ford would give back $10 billion of cash to shareholders, and give one new share and the choice of receiving $20 either in cash or additional new Ford common shares, or a combination of cash and new Ford common stock with an aggregate value of $20. Ford also announced that give the unit of Visteon Corp. to shareholders. (2) other alternatives:
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