Understanding Financial Decision Making
Understanding Financial Decision Making: Tools for Evaluation
Order Instructions:
For this paper, it comes in 7 parts and the writer must label each parts and complete a minimum of one page summary as indicated for each part. The writer must follow critically the instructions and the requirements for each part. The writer must use in text citations for each part , as each part must have a minimum of two sources or two different in text citations. The paper must have a minimum of 10 pages in total excluding any diagrams of presentations that the writer may use. Also remember that you will also have to write an executive summary at the end to conclude the paper as mentioned in the instructions.
Understanding Financial Decision Making: Tools for Evaluation
In this paper, you will examine theoretical and empirical points of view and apply the knowledge you have gained from your study and research in order to understand how financial decisions are made within a large publicly traded company that you choose as an exemplar. You will utilize financial tools to evaluate current financial data and use your calculations to justify those decisions. Approach this exercise as though you were a financial consultant who has been asked to analyze the value of the company as a potential investment. This assignment will require access to in-depth financial information, so selecting a company for which this information is easily obtainable will be most beneficial.
You will conduct a detailed analysis of the financial dealings of your selected organization. Each week you will focus on a different aspect of the company’s financial information. You will explore the monitoring capabilities of the Board of Directors and use financial tools to compare ratios with one of the firm’s competitors. You will establish an estimated growth rate and predict future dividends. In addition, you will use annual reports as a tool in capital budgeting to determine potential real options, establish a market risk premium, calculate the weighted average cost of capital, and compare the mix of debt and equity that the firm uses to an industry average. Finally, you will prepare an executive summary of the company, complete with current stock prices and a recommendation on investing in the business you select. Your paper will contain topics unique to the company chosen, but will incorporate the themes covered in each section.
The Investment Analysis and Recommendation Paper will comprise a minimum of 10 pages in APA style format. Three to five diagrams and presentation slides may be included, but they will be additional to the required length of the paper
Part one
• This week, select a publicly traded company that you wish to analyze for this paper. Submit the name to your Instructor for approval. Obtain the company’s financial statements (annual report) and the most recent proxy statement.
Using the information on the proxy statement:
• Evaluate the monitoring potential of the firm’s Board of Directors.
• Identify the strengths and weaknesses of how the board is structured, as well as any ethical concerns.
Write a 1-page summary of your findings.
Part two
• Investment Analysis and Recommendation Paper
For this part, you will assess the company you selected for your Investment Analysis and Recommendation Paper relative to its competitors in terms of financial ratios. Financial ratio reports are available on numerous Web sites (examples: Reuters, Google, Finance, Hoovers). Remember, different Web sites may use slightly different definitions.
Using income statements and balance sheets for your company AND at least one of its main competitor’s, respond to the following:
•Calculate the DuPont identity for both companies for the past three years.
•Discuss any differences and/or trends that emerge.
Write up a 1-page summary of your findings, including any calculations you made, and how you gathered your information.
Part three
Investment Analysis and Recommendation
• This part of the Investment Analysis and Recommendation Paper requires you to establish an estimated growth rate in earnings and dividends for your company. Note, in the dividend growth model, “g” is the growth rate for earnings AND dividends. You might want to check historical growth rates for the company (in terms of earnings and dividends). Also, many people rely on analyst forecasts. Be sure to justify your growth rate selection and explain how you arrived at the number. Assume your company is a constant growth stock. Use your estimated growth rate to solve for the required rate of return using the dividend discount model. After completing your calculations, respond to the following:
• Does the number you arrived at seem logical or feasible?
• Did you face any problems or issues using the dividend growth model? Does your company pay a dividend?
• Is it reasonable to assume constant growth for your company?
Write up a 1-page summary of your findings, including any calculations you made, and how you gathered your information.
Part four
• For this part, you will read the text portion of your company’s annual report. As you do so, focus on the following:
• Identify potential real options that might arrive in this firm’s business.
• Are these options industry specific or company specific?
• How would these options affect their capital budgeting process?
• Justify your answers.
Write up a 1-page summary of your findings, including any calculations you might have made, and relate how you reached your conclusion.
Part five
• For this part of your Investment Analysis and Recommendation Paper, find an estimate of beta for your company. You might consider examining/using an industry average beta, especially if the reported beta you find seems unrealistic or inappropriate. Note: You should probably check your beta across a few different sources, because sometimes they vary. Find the current interest rate (yield) for 3-month Treasury bills. Determine an appropriate market risk premium. Be sure to consider the size of your firm when estimating an appropriate premium.
After making your calculations:
• Using all this information, what is the expected return for your company using CAPM?
• In Week 3, you estimated a required rate of return using the dividend discount model. How does your CAPM number compare?
Write up a 1-page summary of your findings, including any calculations you might have made.
Part six
• For this part, your assignment is to calculate the weights (proportions) of debt and equity for your company. For equity you can use the market value of stock (number of shares times the current stock price). For debt, you can use the book value of long-term debt (from the balance sheet). While market values of debt are “better,” they are rather difficult to obtain. Estimate the required rate of return on debt for your company. The following are three possible approaches: a) You can use the credit rating provided by Standard & Poor’s or Moody’s. Use the ratings to find current yields above risk-free rates. b) Go to FINRA Market Data. This will give the yield to maturity for EACH bond. You need one measure of the cost of debt, so you will have to figure out an appropriate way to handle multiple debt issues. c) If your company does not have publicly traded debt (and/or both the previous two approaches did not work), you will need to read the footnotes to the annual report. You may be able to get their estimated borrowing rate. After gathering the information:
• Estimate your company’s weighted average cost of capital. You can use the income statement information to estimate the tax rate.
• If your company uses this in the capital budgeting process (i.e., as the discount rate in NPV and IRR), what assumptions are they making?
• Does your company face any particular difficulties in using this rate? For example, does your company have different divisions or units that might have differing levels of risk?
Write up a 1-page summary of your findings, including any calculations you might have made, and describe which method you used to find the required rate of return on debt for your company.
Part seven
• For this part you will prepare the final section of your Investment Analysis and Recommendation Paper, consisting of the capital structure choices, as well as an executive summary of your research.
You will examine the mix of debt and equity that your firm uses. After finding this information:
• Compare this to an industry average or a main competitor. What are the differences?
• Based on what you know about your selected company, do these differences seem appropriate?
• Relate your company’s capital structure choices to the appropriate capital structure theory (ies).
Also, as a component of your executive summary, obtain the current stock price for your company and use it as an additional calculation. Based upon all of your research, would you recommend investing in this company? Justify your answer.
SAMPLE ANSWER
Ford Motor Group is a multinational public company that’s based in Michigan in the USA. Its shares are traded in NYSE under the initial F. It majors in automotive production and its current Executive chairman is William C. Ford, Jr. while the CEO is Mark Fields. The current brands or models are Ford Focus, Ford Escort, Ford Cortina, Ford Sierra and Ford Capri. There are several other brands that Ford manufactures besides an array of trucks and other automobiles. The Ford Family owns 2% of the company while the employees number about 181,000. It has a market capitalization of $54.65 Billion and its shares are currently trading at $14.09 dollars with a yield of 3.5%. Ford has 9 million outstanding shares while the market prices of its shares are currently costing 14.1 which amounts to a total of $126.9 million in outstanding stock valuation.
Part One
Board of Directors
The directors of Ford Motor Group have impeccable academic backgrounds and experience that warrant their positions. The executive management of the Ford board as at the end of July 2014 was chaired by William Clay Ford Jr., the executive chairman while the CEO was Mark Fields (CEO & President). For the other members of the board see appendix D.
Monitoring Potential of the Firm’s Board of Directors
Mark Fields, the current CEO and President, was initially appointed as the America’s President of operations in the year 2012. (Adams, 2008, p. 46) The board is mostly concentrated in running the operations of the company from the head office. Almost 50% of its annual turnover is achieved in North America while the rest are from South America, Europe, Asia, pacific and Africa. The duties of each director are not included in the reports together with the salaries of other senior staff. The academic background for the senior positions office holders is not available on the 2014 proxy annual report. The performance of Ford Motor Group has not been very impressive and it was expected that it would have more financial problems in the current financial period. However, Ford has endured hard times before and it’s expected that it will come out of financial woes on its own.
Strengths and Weaknesses of Board Structure
The major strengths of the Ford Motor Group board are the wide experience and skills the director’s posses. The executive chairman has been a director since 1988 and has also been the vice president at the commercial truck center before his recent promotion. He has also been the chair of the finance committee and the chairman of eBay Inc. The other board members are also equally skilled and experienced in automobile industry.
The board has also professional structures that vet all the qualifications of the directors before they are appointed. The nominating and governance committee scrutinizes all the background information on all the nominees before their names are forwarded to the board.
The major weaknesses of the board are the lack of clearly defined organization structures that spell out the role of each director and the hierarchy of the functions of their offices and their occupants. The structures are not clear and maybe they have their own system of operations but the structures have to be clearly drawn and the functions of each department clearly defined and addressed. (Corporate Ford Website)
Ethical Concerns
The other ethical issues that may arise is that some directors like Gerald L. Shaheen who may have served as the president of the Caterpillar Inc before he retired may be having the connections with the group hence his interests may also be linked to the company. H e should be allowed to serve the interests of one company only.
The other issue is that the company has some former politicians in the board like the former governor Jon M. Huntsman Jr. It reflects a little unprofessionalism to include some politicians in the board and who may have had different policies that may have been unpopular with some people hence it can influence the performance of the company negatively.
Part Two
Competitive Financial Ratio Comparison
Ratio analysis provides a diagnostic tool that identifies the areas prone to create problems for the company and evaluates the opportunities within the company and its competitors. The ratios of Ford Motor Group provide a relatively positive view of the company. Appendix C provides all the comparisons and ratio summaries for Ford and GM.
The net assets turnover for Ford Motor Group decreased by 2.5% in the year 2013 as compared to a 50% increase in the year 2012. GM registered a decrease of 13% in its net assets turnover in the year 2013 while in the year 2012 it experienced an increase of 6.5%. (Vance, 2003, p. 19)
DuPont Identity
The following is the Dopont model breakdown for Ford and GM. The profit margin for Ford amounted to 13% of sales for both 2013 and 2012. The return on Equity was 27% in 2013 while in2012 it was 36%. The profit margin on sales for GM amounted to 12% in 2013 while in 2012 it was 7%. The ROE for GM amounted to 13% and 17% respectively for the years 2013 and 2012 respectively. The return on assets amounted to 3 and 4% respectively. The earnings per share for Ford in 2013 and 2012 were 1.54 and 1.48 respectively while the dividends per share amounted to 0.4 and 0.2 respectively. Both companies are heavily leveraged and Ford is the one that has the highest concentration of debt compared to GM.
The interest expenses for Ford increased by 16.3% in 2013 while in 2012 it had decreased by 12.7%. The interest expense for Ford in the year 2013 and 2012 were 829 million and 713 million respectively. GM interest expenses decreased by 31.7% in 2013 while in 2012 the expenses decreased by 9.4%. The interest expenses for 2013 and 2012 were 334 Million and 489 Million respectively.
The net assets turnover for Ford’s decreased by 2.5% in the year 2013 as compared to the 50% increase in the year 2012. GM registered a decrease of 13% in its net assets turnover in the year 2013 while in the year 2012 it experienced an increase of 6.5%. The dividend per share for Ford in 2013 and 2012 was 0.4 and 0.2 respectively. (See appendix E) This represented a return of 22% to the shareholders in 2013 while in 2012 it was 23%. (Luenberger, 1997)
Financial Data of Ford Motor Group
The financial performance of Ford Motor Group seems to be better than General Motors for the years 2013, 2012 and 2011. (See table 1
Table 1
| Ford (Billions) | Year 2013 | Year 2012 | Year 2011 |
| Net income | 7.15 | 5.67B | 20.21 |
| Revenue | 146.92 | 195.06 | 135.61 |
| Assets | 202.03 | 189.41 | 178.35 |
| Equity | 26.38 | 15.95 | 15.03 |
|
GM (Billions) |
Year 2013 |
Year 2012 |
Year 2011 |
| Net income | 5.35 | 6.19 | 9.19 |
| Revenue | 155.43 | 152.26 | 150.28 |
| Assets | 166.34 | 149.42 | 144.60 |
| Equity | 42.61 | 36.24 | 38.12 |
Differences or Trends
The equity multipliers for Ford are higher than those of GM which means that Ford is more levered than GM. (See table 2) and Appendix C for GM.
Table 2
DuPont Analysis
|
ROE
|
Profit Margin
|
Asset Turnover | Equity Multiplier
|
||
| Ford | Year 2013 | 0.07 | 0.72 | 0.75 | 7.66 |
The ratios of Ford Motor Group for ROE and Profit margins are better than those of GM. (See Table 1 & 2 above) The equity multiplier for Ford Motor group is 7.66%. However, the asset turnover for GM is higher than Ford. (See Appendix C) The net assets turnover for Ford’s decreased by 2.5% in the year 2013 as compared to a 50% increase in the year 2012. GM registered a decrease of 13% in its net assets turnover in the year 2013 while in the year 2012 it experienced an increase of 6.5%. The current ratios for Ford Motor group for 2013, 2012 and 2012 were 2.11, 2.32 and 2.26 respectively compared to Gm’s 1.31, 1.3 and 1.22 for the same period respectively. The quick ratios for Ford Motor group for the same period were 1.98, 2.18 and 2.15 compared to GM’s 1.08, 1.02 and 0.95 respectively. Ford Motor Group seems to have higher and better liquidity ratios than GM. The financial stability of Ford Motor Group is more promising that GM’s. The other competitive ratios are attached on the appendix.
Part Three
The information was gathered from the Yahoo’s business finance websites
Dividend Growth Model
The dividend growth model is also known as the Gordon Model. The dividend growth model is a concept that determines the value of stock or a business firm. It utilizes the dividend yield as an investment strategy. Companies with reasonable payouts ratios and profitable dividend yields are considered safe investment. The following are the calculations for obtaining the Dividend Growth model;
Table 3
Growth Rate for Ford Motor Group
| Analysis | Formula % | Year 2013 |
| ROE | Net income/ Equity | 0.27 % |
| Retention ratio | 1 – (cash dividends/ net income) | 0.78 % |
| Growth rate in earnings (g) | Retention ratio x ROE | 0.21 % |
For the formula used to calculate the ratios above see appendix E.
The Financial Information and Important Growth Trends for Ford Motor Group for 2013
| Ford Motor Group | 2013 | |
| ROE | Net Income/Equity | 0.27 |
| Retention Ratio | 1-(cash dividends/net income) | 0.78 |
| Growth rate in earnings | Retention rate X ROE | 0.21 |
| Dividend Discount Model | Return rate R = Dividend /price of stock + g | 0.24 |
| Price of Stock | Dividend/Return Rate R – Growth Rate g | 14.07 |
Issues with Using the Growth Model
The growth model is only an indicator and it cannot guarantee the performance of the company in future. However, it can be used to construct the investment portfolio of a business firm. The dividend earnings growth model for Ford has been calculated on average per year. There are financial periods where the dividend pay rate and amounts are similar hence the growth trend is not reliable as the average is very low. The general average however is 0.212%.
Reasonableness of Constant Growth
The growth rate number is logical as it reflects the general performance on the ground. The major problems with the calculation are the constant figures payable as dividends reflects a constant growth trend and the calculations reflect a zero growth trend. The company pays dividend as shown in the table above. It would be fair assume a constant growth trend for Ford Company.
Part Four
Annual Report
Potential Real Options
The potential real option analysis (ROV) refers to the valuation techniques that are applied in capital budgeting. To undertake some business initiatives or activities such as expansion or investment in capital projects or even abandon some projects is the objective of real call or even put option. Real options are different from the finance options as they are not traded on the securities and the option holders can also influence the real value of the options projects.
Stock Options for Employee compensation for the year 2013
| Fair value per stock option | 2013 | 2012 | 2011 | ||
| 5.03 | 5.88 | 8.48 | |||
| Assumptions made | |||||
| Annualized Dividend yield | 3% | 2% | – | ||
| Expected volatility | 52.20% | 53.80% | 53.20% | ||
| Risk free interest rate | 1.50% | 1.60% | 3.20% | ||
| Expected stock option (yrs) | 7.7 | 7.2 | 7.1 | ||
| Company stock options as at December 31 2013 (millions) | |||||
| Outstanding options | Exercisable options | ||||
| Shares | weighted av life yrs | weighted av Exc price | Shares | weighted av life yrs | |
| Range Prices available in $ | |||||
| 1.96 -2.84 | 15.5 | 5.2 | 2.16 | 15.5 | 2.16 |
| 5.11 – 8.58 | 23.2 | 3.1 | 7.29 | 23.2 | 7.29 |
| 10.11 – 12.98 | 29.1 | 5.3 | 12.58 | 19.1 | 12.56 |
| 13.07 – 16.64 | 11.3 | 2.8 | 13.86 | 9.8 | 13.71 |
| Total stock options | 79.1 | 67.6 | |||
Real options are also known as stock valuations. Several options in investment valuation and analysis depend on the objective of the project. The following is an example of employee stock valuation.
These options are company specific and they are payable on the range of prices available and the average years the employee has spent in the company. The share prices are weighted as shown on the table above. (Garrison, Noreen & Brewer, 2009, p. 65) The stock options would have to be provided for as their prices are usually provided for employees only and not for the general investors.
Capital Budgeting Process
The options would have to be provided for when budgeting for capital projects. All projects with average returns that are less than the weighted average cost of capital should be rejected as the cost of capital would be more the profits of the project.
Part Five
Beta
Beta is used in business finance a means of measuring the investment portfolio risk. A beta of 2 means that for every 1% change in the benchmarks value, the value of a given portfolio changes by 2%. The beta for Ford is 0.88%.
Expected Return – CAPM
The beta for Ford Motor Group according to yahoo business finance is 0.88%. The current risk free market rate is 0.03%. The rate of risk premium is the amount that the expected asset’s rate of return is extra or exceeds the market risk free rate of interests. The risk premium for trading companies is the company stocks or their expected rate of return less the risk free rate of return.
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The average historical equity premium is 6.9%, so 7% is an estimate for the risk premium (Ross, Westerfield & Jaffe, 2013).
The average Capm rate is equal to 6.52% as calculated in the excel formula which is attached. The expected return for Ford Motor Group is 7%. Using the model, the rate of return is 6.52%.
The cost of equity using the capital asset pricing model = Risk Free Rate + Beta * Market Risk Premium = 3+0.88*3= 11.64 (French, 2003, p. 65)
Ford has outstanding shares numbering 3.88 Billion while the market prices of its shares were costing 14.07 which amounts to a total of $54.59 Billion. (Black, Jensen and Scholes, 1972)
The Capital Asset Pricing theory suggests that the cost of capital depends largely on how the asset was initially. The cost of the debt capital, the cost of the equity capital and the weighted average of the two depending on the debt and equity financing represents the actual cost of capital.
Dividend Growth Model versus CAPM
The CAPM is 0.916% compared to the 0.21 %. The differences are not so high but the most logical one is CAPM which is about 1%. However the general trend for the Ford Motor Group has been retrogressive trend at around -0.3. (Appendix B)
Part Six
Debt and Equity
Equity
According to Modigliani and Miller (1958, p. 260) the cost of equity capital is mostly determined by the asset’s cost of capital and not the other way round.
Ford has outstanding shares numbering 3.88 Billion (see table 5) while the market prices of its shares were costing 14.07 which amounts to a total of $54.59 Billion. The Capital Asset Pricing theory suggests that the cost of capital depends largely on how the asset was initially financed (Bierman & Smiddt, 1966). The cost of the debt capital, the cost of the equity capital and the weighted average of the two depending on the debt and equity financing represents the actual cost of capital. (Black, Jensen and Scholes, 1972, p.80)
Table 5
Ford’s Market Value of Equity
| Company name | Year 2013 |
| Shares outstanding | 3.88B |
| Price as of 14.07 per share
Market value of equity |
54.59B
26.83B |
| CAPM | 6.52% |
The rate of Capital Asset Pricing model for Ford Motor Group is 6.52%.
Debt
Interest payments that are payable by lenders are all deductible from the ones or a company’s taxable income while the payments to shareholders as dividends are not. Most tax systems encourage the companies to use debt financing instead of equity. (Black, Jensen and Scholes, 1972, p.118) The higher the interest rates the higher the incentive. The interest expenses for Ford increased by 16.3% in 2013 while in 2012 it had decreased by 12.7%. The interest expense for Ford in the year 2013 and 2012 were 829 million and 713 million respectively. GM interest expenses decreased by 31.7% in 2013 while in 2012 the expenses decreased by 9.4%. The interest expenses for 2013 and 2012 were 334 Million and 489 Million respectively. (Bodie, Kane, Marcus, 2008, p. 303)
The capital structure for Ford is mostly made up of borrowed money. In 2013, the long-term debts amounted to $114, 688 million while in 2012 and 2011 the debts amounted to 105, 058 and 99488 respectively. The total stockholder equity amounts to $26,383 Million and $15,947 million for the same period. Ford Company is highly levered and it needs to cut down on borrowing. General Motor’s long term debts amounted to $6573 Million and $3424 Million for the year 2013 and 2012 while the total stockholders equity amounted to $42,607, $36,244 and $38120 for the years 2013, 2012 and 2011. Gm is relatively levered. (Markowitz, 1959, p. 78)
The credit ratings for Ford currently are CCC+ from S & P performance of CC in 2012. Ford managed to pay its 9.9 Billion debts in the year 2014 and it helped to boost its credit rankings. Ford credit rankings place it in front of GM and Chrysler and they are currently fitting hard to avoid bankruptcy petition. (Luenberger, 1997, p. 48)
Table 6
Cost of Debt for Ford Motor Group for the year 2013
| Company name | 2013 |
| Long term debt
Current Portion of Debt Total Debt |
114.69B
– 114.69B |
| Cost of Debt % | 7% |
| Tax Rate | 40 |
| The cost of debt for Ford Motor Group is 7%, a rate which is fairly affordable. Given the current ratio of 2.11 Ford can comfortably afford to pay its debts. |
Table 7
Calculations for Weighted Average Cost of Capital for Ford Motor Group
| Ford | Value $ | % | ||||
| Equity (Rs) | 26.38B | 18.7 | ||||
| Debt (Rb) | 114.69 | 81.3 | ||||
| Total Value | 141.07 | 100Rs | ||||
The formula for calculating the weighted average cost of capital is:
| Ford | Value | % |
| Equity(Rs) | 26.38 | 0.87 |
| Debt(Rb) | 114.69 | 0.13 |
| Total Value | 141.07 | 1 |
| Rwacc | 3.98% |
The WACC for Ford Motor Group is 3.98% which reflects a favorable position compared to its cost of debt which is 7%. (See Table 6 & 7 above)
Capital Budgeting Assumptions
The major assumptions are that the tax rate is 40%. Following the losses incurred by ford in its foreign branches no taxes were chargeable in 2013.
Competitive Review of Debt and Equity Mix
The average weighted cost of capital is higher for Ford than GM. In 2013, the WACC for Ford has a WACC of 3.98% while for GM it was 3.16%. Ford Motor Group seems to have slightly more debts compared to GM.
Competitive Review
| GM | Value | % |
| Equity(Rs) | 42.61 | 0.87 |
| Debt(Rb) | 6.57 | 0.13 |
| Total Value | 49.18 | 1 |
| Rwacc | 3.16% |
Part Seven
Capital Structure Theories
According to Modigliani and Miller (1958, p. 261) the cost of equity capital is mostly determined by the asset’s cost of capital and not the other way round.
Ford has outstanding shares numbering 3.88 Billion while the market prices of its shares were costing 14.07 which amounts to a total of $54.59 Billion. The Capital Asset Pricing theory suggests that the cost of capital depends largely on how the asset was initially financed (Bierman & Smidt, 1966, p. 300). The cost of the debt capital, the cost of the equity capital and the weighted average of the two depending on the debt and equity financing represents the actual cost of capital. (Black, Jensen and Scholes, 1972, p. 120)
Some theories of the Capital assets pricing model, have been applied in relation to heterogeneous beliefs and risk free lending rate elimination (Black, 1997, p. 444).
Summary
Ford Motor Group financial performance seems to be improving as in the year 2013 it had a Gross Profit 7.9% as opposed to 2012 when it decreased by 5% from the previous year. The GP for General Motors on the other hand increased by 70% in the year 2013 while in the year 2012 it decreased by 43%. The net profit for Ford for the same period increased 26% in 2013 while in 2012 it decreased by 72%. GM registered a 13.7 % reduction in 2013 while in 2012 it registered a further reduction of 32.7%. The total shareholder’s equity for Ford increased by 65.5% in 2013 while in 2012 it increased by 6%. General Motor’s shareholders equity increased by 17.6% in 2013 while in 2012 it decreased by 4.9%. In 2012 Ford Motor Group reduced its total liabilities by almost 70% while GM increased its total liabilities by 15.6% in 2013. The sales revenue for Ford increased by 10% in 2013 while GM sales for the same period increased by 2.1%. Ford total sales revenues increased from $133,559 million in 2012 to $146,917 million in 2013. GM sales for the same period were 152256 million and 155427 million from the same period respectively. The interest expenses for Ford increased by 16.3% in 2013 while in 2012 it had decreased by 12.7%, GM interest expense decreased by 31.7% in 2013 while in 2012 it decreased by 9.4%. (Bodie, Kane, Marcus, 2008, p. 303)
The ratios for Ford also indicate that the liquidity ratios are above average for all the years for Ford Motor Group. The current ratios were 2.11, 2.32, 2.26 for the years 2013, 2012 and 2011. The quick ratios also indicated a positive trend. The Times interest earned for the year 2013 for Ford were 9.45, 11.83 and 11.63 for the years 2013, 2012 and 2013. The interest cover for the same period indicated the same results like Times interest earned. (Drucker, 1999, p. 155)
The ford Family owns 2% of the company while the employees number about 181,000. It has a market capitalization of $54.65 Billion and its shares are currently trading at $14.09 dollars with a yield of 3.5%. (Ross, Westerfield & Jaffe, 2013, p. 175) The net asset turnover for Ford decreased by 2.5% in the year 2013 as compared to a 50% increase in the year 2012. GM registered a decrease of 13% in its net assets turnover in the year 2013 while in the year 2012 it experienced an increase of 6.5%. The dividend per share for Ford in 2013 and 2012 was 0.4 and 0.2 respectively. This represented a return of 22% to the shareholders in 2013 while in 2012 it was 23%.
Ford Motor Group has a great potential to return to great profitability and also be able to pay off all its outstanding debts. The Current ratios and the quick acid test ratios indicate that Ford Motor Group has a stable liquidity and with the right leadership it would be able to make more profits like the earlier years. Given all these factors I would definitely invest my money in Ford Motor Group but I would be cautious besides I would also be requiring a plan on how the management of the company would be proposing to settle the huge loans that it owes several financiers. Ford may be earning some profits but it has a lot of debts that are four or five times its total equity. The classification of shares as common shares and also class B shares that have unequal voting rights is also some disquietedness among the shareholders.
Reference
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Appendix A
The Historical Share Prices for Ford Motor Group
| Date | Shares | |||
| 2013 | Low | High | Average | % Trend |
| 1-Sep | 16.21 | 17.35 | 16.78 | |
| 8-Sep | 17.1 | 17.68 | 17.39 | 3.63528 |
| 15-Sep | 17.3 | 17.7 | 17.5 | 0.632547 |
| 22-Sep | 16.69 | 17.34 | 17.015 | -2.77143 |
| 6-Oct | 16.35 | 17.12 | 16.735 | -1.64561 |
| 13-Oct | 16.92 | 17.55 | 17.235 | 2.98775 |
| 20-Oct | 17.39 | 18.02 | 17.705 | 2.727009 |
| 27-Oct | 16.76 | 17.72 | 17.24 | -2.62638 |
| 4-Nov | 16.55 | 17.2 | 16.875 | -2.11717 |
| 11-Nov | 16.64 | 17.2 | 16.92 | 0.266667 |
| 18-Nov | 16.82 | 17.18 | 17 | 0.472813 |
| 2-Dec | 16.42 | 17.2 | 16.81 | -1.11765 |
| 9-Dec | 16.2 | 16.79 | 16.495 | -1.87388 |
| 16-Dec | 15.17 | 16.99 | 16.08 | -2.51591 |
| 23-Dec | 15.1 | 15.5 | 15.3 | -4.85075 |
| 30-Dec | 15.25 | 15.64 | 15.445 | 0.947712 |
| 2014 | ||||
| 6-Jan | 15.35 | 16.11 | 15.73 | 1.845257 |
| 13-Jan | 16.08 | 16.78 | 16.43 | 4.450095 |
| 20-Jan | 15.78 | 16.68 | 16.23 | -1.21729 |
| 27-Jan | 14.9 | 16.01 | 15.455 | -4.77511 |
| 3-Feb | 14.4 | 15.13 | 14.765 | -4.46457 |
| 10-Feb | 14.78 | 15.36 | 15.07 | 2.065696 |
| 24-Feb | 15.07 | 15.46 | 15.265 | 1.293962 |
| 3-Mar | 15.03 | 15.83 | 15.43 | 1.080904 |
| 16-Mar | 15.16 | 15.74 | 15.45 | 0.129618 |
| 30-Mar | 15.48 | 16.49 | 15.985 | 3.462783 |
| 6-Apr | 15.59 | 16.17 | 15.88 | -0.65687 |
| 20-Apr | 15.71 | 16.44 | 16.075 | 1.22796 |
| 27-Apr | 15.75 | 16.2 | 15.975 | -0.62208 |
| 4-May | 15.43 | 15.95 | 15.69 | -1.78404 |
| 11-May | 15.55 | 15.9 | 15.725 | 0.223072 |
| 25-May | 16.05 | 16.56 | 16.305 | 3.688394 |
| 8-Jun | 16.5 | 17.12 | 16.81 | 3.097209 |
| 15-Jun | 16.38 | 16.87 | 16.625 | -1.10054 |
| 22-Jun | 16.68 | 17.29 | 16.985 | 2.165414 |
| 29-Jun | 17.07 | 17.4 | 17.235 | 1.471887 |
| 6-Jul | 17.05 | 17.49 | 17.27 | 0.203075 |
| 20-Jul | 17.51 | 18.12 | 17.815 | 3.155761 |
| 27-Jul | 16.72 | 17.85 | 17.285 | -2.97502 |
| 3-Aug | 16.74 | 17.14 | 16.94 | -1.99595 |
| 10-Aug | 17.11 | 17.49 | 17.3 | 2.125148 |
| 17-Aug | 17.51 | 17.52 | 17.515 | 1.242775 |
| 24-Aug | 17.19 | 17.49 | 17.34 | -0.99914 |
| 31-Aug | 16.94 | 17.87 | 17.405 | 0.374856 |
| 7-Sep | 16.5 | 16.87 | 16.685 | -4.13674 |
| 14-Sep | 16.16 | 16.77 | 16.465 | -1.31855 |
| 28-Aug | 14.44 | 16.4 | 15.42 | -6.3468 |
| 5-Oct | 13.52 | 14.7 | 14.11 | -8.49546 |
| 12-Oct | 13.26 | 14.25 | 13.755 | -2.51595 |
| 19-Oct | 13.65 | 14.49 | 14.07 | 2.290076 |
| -15.6592 | ||||
| Trend | -0.31957 | |||
Source: www. Yahoo business Finance
Appendix B
The Financial Ratios of Ford Motor Group
| Ford Motor Group | 2013 | 2012 | 2011 | |
| Current Ratio | Total Current Assets/Total current liabilities | 2.11 | 2.32 | 2.26 |
| Quick Ratio | TT C/ Assets – inventories /TT/ C Liabilities | 1.98 | 2.18 | 2.15 |
| Receivable turnover | Annual credit sales/average receivables | |||
| Inventory Turnover | Cost of goods sold/Average inventory | 17.00 | 17.51 | 19.87 |
| Asset turnover | Sales/Average total assets | 0.75 | 0.73 | 0.76 |
| Dividend yield | Div per Share / Current Share price | 0.03 | 0.01 | |
| Dividend cover | EPS/ Dividend per Share | 3.70 | 7.40 | |
| Net assets turnover | Net assets / total sales | 1.24 | 1.27 | 0.85 |
| Times interest earned | EBIT/Annual Interest Expense | 9.45 | 11.83 | 11.63 |
| Debt to total Asset | Debt/Assets | 0.57 | 1.03 | 0.56 |
| Book value per share | 9.17 | 9.17 | 9.17 | |
| Interest cover | EBIT/Annual Interest Expense | 9.45 | 11.83 | 11.63 |
| Profit margin on sale | GP/sales | 0.13 | 0.13 | 0.14 |
| R.R return on assets | EAT/Total Assets | 0.04 | 0.03 | 0.11 |
| R.R com stock equity | Profit after taxes/Shareholders equity | 0.27 | 0.36 | 1.35 |
| Earnings per share | Profit after taxes-pref div)/No. of comm O/S | 1.54 | 1.48 | |
| Payout Ratio | cash dividends/income | 0.00 | 0.00 | 0.00 |
| ROE | Return On Equity (ROE) | 0.27 | 0.36 | 1.35 |
| ROA | Return on average Assets | 0.04 | 0.03 | 0.11 |
Source: (Ford Motor Group Annual Report, 2013)
Appendix C
The Financial Ratios for General Motors
| GM | 2013 | 2012 | 2011 | |
| Current Ratio | Total Current Assets/Total current liabilities | 1.31 | 1.30 | 1.22 |
| Quick Ratio | TT C/ Assets – inventories /TT/ C Liabilities | 1.08 | 1.02 | 0.95 |
| Receivable turnover | Annual credit sales/average receivables | |||
| Inventory Turnover | Cost of goods sold/Average inventory | 9.56 | 9.74 | 9.16 |
| Asset turnover | Sales/Average total assets | 0.93 | 1.02 | 1.04 |
| Dividend yield | Div per Share / Current Share price | |||
| Dividend cover | EPS/ Dividend per Share | |||
| Net assets turnover | Net assets / total sales | 0.27 | 0.24 | 0.25 |
| Times interest earned | EBIT/Annual Interest Expense | 23.33 | -57.68 | 17.99 |
| Debt to total Asset | Debt/Assets | 0.04 | 0.02 | 0.02 |
| Book value per share | ||||
| Interest cover | EBIT/Annual Interest Expense | 23.33 | -57.68 | 17.99 |
| Profit margin on sale | GP/sales | 0.12 | 0.07 | 0.13 |
| R.R return on assets | EAT/Total Assets | 0.03 | 0.04 | 0.06 |
| R.R com stock equity | Profit after taxes/Shareholders equity | 0.13 | 0.17 | 0.24 |
| Earnings per share | Profit after taxes-pref div)/No. of comm O/S | 2.92 | ||
| Payout Ratio | cash dividends/income | |||
| ROE | Return On Equity (ROE) | 0.13 | 0.17 | 0.24 |
| ROA | Return on average Assets | 0.03 | 0.04 | 0.06 |
Source: General Motors Annual Report.
The data was obtained from the annual reports but the calculations were done using excel while applying the formulas shown on the tables.
Appendix D
Members of the Ford Motor Group Executive Board
Richard A. Gephardt, Ellen Marram, Stephen Butler, Kimberly Casiano, Edsel Ford, Homer Neal, Antony F. Earley, James P. Hackett, John L. Thornton, Gerald L. Shaheeen, James H. Hance, Jr., William W. Helman John C. Lechieter, James H. Hance and Jon M. Huntsman.
(Ford Annual Report, 2013, p.7)
Appendix E
The formula for calculating the Return on Equity (ROE) for Ford Motor Group
The formula for calculating the Dividend Discount Model for Ford Motor Group
Dividend Discount Model (DDM) =
Financial Data for Ford Motor Group
| Ford Motor Group (Billions) | Year 2013 |
| Net income | $ 7.16 |
| Equity | $26.38 |
| Total dividends paid | $1.57 |
| Outstanding shares | 3.88 |
| Earnings per share (EPS) | $1.82 (dollars) |
| Dividends paid per share | $0.4 (dollars) |
| Stock price as of 2/11/2014 | $14.07 |
Source: Ford Group Annual Report for 2013
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