Ford motor company s value enhancement plan case study

The VEP is detrimental to the interests of the common shareholder as it issues additional common shares to the Ford family free of cost.

The End…. 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. Tax implications of Dividends - Dividends from stocks are taxable, as are any capital gains they generate. Thus, the effect of cash option is similar to share buyback. How does VEP work? This results in the decrease in share price, while increase in the number of outstanding shares. Therefore, VEP is better than cash dividend as it is more tax efficient, and compared with share repurchase, it helps the shareholders to remain or increase their control in the company, thus fulfilling their needs. Does Ford have too much cash? For other institutional investors, the choice could depend heavily on the way they are taxed for non-operating income. What are the alternatives for distributing cash? Since it has been mentioned that liquidity for the family members was a major concern due to real estate disputes, divorce settlements etc. 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 favor of the Ford family. If shareholders choose stock option, they can have more control over the company by increasing the voting power.

Based on Exhibit 1 Excess funds can be a signal to the markets that the company has very little investment prospects lined up Although cash balances can sometimes be desirable, this is only once they are adequate enough to meet short term obligations.

The cost of capital for Ford in was 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.

Companies tend to keep dividend payout ratio constant, so dividend for each new Ford share will decrease because share price falls. Dividend Declaration The Board also declared a second-quarter dividend of 50 cents a share on the company's common and Class B stock - unchanged from the prior quarter. However it would appear that Fords excess cash balances have arisen more from a lack of better options to management rather than necessity and this has been reflected in its undervalued stock Although Ford had acquired other auto manufacturers in the past, it would appear that they did not have any more such opportunities available now All investors are total return maximizing, precluding any preference for dividends Annuities or pension funds or for capital gains. Shareholders will receive a distribution of Visteon stock based on the number of Ford shares they own and the total number of Ford shares outstanding on the distribution record date. The cost of capital for Ford in was Academic Press advanced finance series. Because a share repurchase would reduce its voting right in the company, the Ford family considered VEP as a suitable option. In terms of cash option, since there is no good things to do with the massive cash reserve, returning the excessive cash allows shareholders to make profitable investment by themselves.

If the stock of Ford is perceived undervalued then 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.

Mergers, acquisitions, and other restructuring activities.

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. If shareholders choose stock option, they can have more control over the company by increasing the voting power. The given information indicates that Ford carries the highest amount of cash and marketable securities among the three companies. They can withdraw a part of their current investment and invest it profitably elsewhere; meanwhile, they can retain their interest in the company. Pay Dividends Uniformly— W. Also, as we discussed in the cash option, share price will increase, so, shareholders will benefit a lot from holding more new Ford shares. How does VEP work? Since it has been mentioned that liquidity for the family members was a major concern due to real estate disputes, divorce settlements etc. References: 1. If the stock of Ford is perceived undervalued then 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. Ford competes in an industry that is notoriously sensitive to the economic cycle, and generally companies in cyclical industries have to keep cash in reserve to cover up for cyclical downturns. For other institutional investors, the choice could depend heavily on the way they are taxed for non-operating income. This suggests clearly that Fords excess cash balances are not working for it or its shareholders. This results in the decrease in share price, while increase in the number of outstanding shares. The proposed VEP if successful would see the cash reserves of the company reduced by 10 billion, this drastic reduction in cash will send mixed signals to analysts and the market as a whole.

All external references and sources are clearly acknowledged and identified within the contents. At face value the VEP seems to be a good idea; return value to stockholders in the form of cash, without having to compromise control over the company.

The cost of capital for Ford in was Firstly, pension funds always need to have a strong position of liquidity.

ford motor companys value enhancement plan pdf

Reduction below Pay Dividends Uniformly— W. 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.

what is the vep plan designed to address? do you think it is effective?

A companys stock price will increase only if the company can reinvest the money and earn a higher rate of return than the required rate of return demanded by investors.

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Ford Motor Value Enhancement Plan Solution