1. Does Ford have too much cash?
The amount of cash that Ford is carrying on its balance sheet is too much considering that additional money not used for the advancement of the company belongs to the owners of the firm, the shareholders. Having too much cash on its balance sheet will be a disincentive to Ford’s employees who consequently will feel not feel an urgency to perform and add value to the company. Notwithstanding the fact that the company is always on the lookout for acquisition targets even after already purchasing Jaguar Cars, Volvo Cars, and Land Rover in the past ten years, it is imperative that the company does not engage in such activities for the sole purpose of “empire building.” Rather, the company should only pursue those companies that will add value to the overall firm. By 2000, Ford extinguished all of their expanding opportunities. By calculating the WACC and subtracting the Interest Earned on their Cash Holdings, we as a group were able to calculate Ford’s Opportunity Cost of Capital. 11.5% - 4.79% = 6.71%. Thus, it is costing Ford 6.71% per annum to sit on this cash. On the other hand, the fact that Ford’s current, quick, & cash ratios from 1996-1999 are lower than the ratios for its competitors represents a concern in terms of Ford possibly having little wiggle room in relation to paying down its short term obligations. Ford having the higher debt to total asset ratio relative to GM over this period is another cause of unease as using too much debt to pay for its assets can raise the company’s cost of capital. However, fact that its leverage ratio is lower than GM over this four year period demonstrates the company’s solvency and high market capitalization. Using the full $10B to pay for the Value Enhancement Program as a result will decrease its liquidity further and is also a worry due to the cyclicality of the Auto Industry’s profits. Therefore, it is our recommendation that Ford use a slightly lower cash amount of around $6b to recapitalize the firm’s ownership structure.
2. How does the VEP work?
The VEP would work in that all shareholders would exchange their existing common and Class B shares one for one for new Ford Common Shares and new Class B shares. In addition, they would receive either $20 per share in cash or the equivalent value in new Ford common shares based on Ford’s stock price in late July 2000. If Ford’s pre-distribution price was $60, then one new Ford share would be worth $40, and, subsequently, stockholders would have the choice to receive $20 of cash or half a share of new Ford common. Shareholders could also elect to receive a combination of cash and new Ford common stock with an aggregate value of $20. Finally, those shareholders not making an election would be treated as if they made a $20 all cash election. If the $20 per share payment would be distributed pro rata to ensure that the company distributed at most $10b. Dividends on the new shares would be reduced such that shareholders who elected stock only would get the same dividend payment on their package as the quarterly $.50 per share currently being paid.
3. What are the alternatives for distributing cash?
There are several methods which Ford can use to distribute its cash reserves. First, Ford can distribute this money to shareholders by paying them dividends. Paying dividends is the standard way for companies such as Ford to reward its shareholders. Nevertheless, paying dividends is not the most attractive method for rewarding shareholders due to taxation. Dividends in the United States are considered a capital gain; therefore, they are subject to two levels of taxation. One is the federal corporation income tax, which is approximately a 34% marginal tax rate in the United States. However in 2000, for individual taxpayers, the highest U.S. federal tax brackets for ordinary income was 39.6%, and for long-term capital gains...