Investment Analysis and Recommendation
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.
Introduction
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 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%. (Luenberger, 1997) Ford has outstanding shares numbering 9 million 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
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 were Richard A. Gephardt, Ellen Marram, Stephen Butler, Kimberly Casiano, Edsel Ford, Mark Fields (CEO & President, Homer Neal, Antony F. Earley, William Clay Ford Jr., the executive chairman, 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.
Mark Fields, the current CEO and President was initially appointed as the America’s President of operations in the year 2012. (Adams, 2008) 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 2013 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.
Part Two
The net assets 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%. (Vance, 2003)
Dupont Analysis
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 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 | 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 | |||
| Dividend cover | EPS/ Dividend per Share | |||
| 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 | ||||
| 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 | 0.22 | 0.13 | 0.00 |
| ROE | Return On Equity (ROE) | 0.27 | 0.36 | 1.35 |
| ROA | Return on average Assets | 0.04 | 0.03 | 0.11 |
Ford has low average but a relatively stable financial performance as compared to GM very high and very low performances that are unpredictable. Ford has a better growth trend thatis fairly predictable.
| 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 |
Part three
The information was gathered from the Yahoo’s business finance websites http://finance.yahoo.com/echarts?s=F+Interactive#{%22range%22%3A%225y%22%2C%22scale%22%3A%22linear%22}
| Ford’s Dividend Growth Model g | ||||
| Div Number | Record Date | Payable Date | Ford’s Div Pay | Trend |
| 196 | 1/30/2006 | 3/1/2006 | $0.10 | |
| 197 | 5/2/2006 | 6/1/2006 | $0.10 | 0.00% |
| 198 | 8/2/2006 | 9/1/2006 | $0.05 | -50.00% |
| 199 | 1/31/2012 | 3/1/2012 | $0.05 | 0.00% |
| 200 | 5/2/2012 | 6/1/2012 | $0.05 | 0.00% |
| 201 | 8/3/2012 | 9/4/2012 | $0.05 | 0.00% |
| 202 | 11/2/2012 | 12/3/2012 | $0.05 | 0.00% |
| 203 | 1/30/2013 | 3/1/2013 | $0.10 | 100.00% |
| 204 | 5/3/2013 | 6/3/2013 | $0.10 | 0.00% |
| 205 | 8/2/2013 | 9/3/2013 | $0.10 | 0.00% |
| 206 | 11/1/2013 | 12/2/2013 | $0.10 | 0.00% |
| 207 | 1/31/2014 | 3/3/2014 | $0.13 | 25.00% |
| 208 | 5/2/2014 | 6/2/2014 | $0.13 | 0.00% |
| 209 | 8/1/2014 | 9/2/2014 | $0.13 | 0.00% |
| 210 | 10/8/2014 | 12/1/2014 | $0.13 | 0.00% |
| Average p.a. | 5.00% |
The dividend earnings growth trend has been calculated on average per year. There are financial periods where the dividend pay rate and amounts are similar has the growth trend is not reliable as the average would be very low. The general average however is 5%.
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
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 |
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)
The stock options would have to be provided for as their prices are usually provided for employees only and not for the general investors.
Part Five
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.
| Capm = | rf + β (rm -rf) | |||
| rf = risk free rate | 3.00% | |||
| β = Beta | 0.880 | |||
| rm = return on the market | 5.00% | |||
| Capm = | 4.76 |
The average Capm rate is equal to 5% as calculated in the excel formula which is attached. The expected return for Ford Motor Group is 5%. (Reilly & Brown, 2011) Using the model, the rate of return is 4.76%.
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)
Ford has outstanding shares numbering 9 million while the market prices of its shares were costing 14.1 which amounts to a total of $126.9 million. (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.
Part six
| Ford Calculations | 2013 | 2012 | 2011 | |
| Dividend yield | Div per Share / Current Share price | 0.11 | ||
| Dividend cover | EPS/ Dividend per Share | 0.11 | ||
| 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 | ||||
| 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 | 0.22 | 0.13 | 0.00 |
| ROE | Return On Equity (ROE) | 0.27 | 0.36 | 1.35 |
| ROA | Return on average Assets | 0.04 | 0.03 | 0.11 |
Part Seven
Capital Structure
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) The higher the rate of interest the higher the incentives. 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)
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)
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. According to Modigliani and Miller (1958) 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 9 million while the market prices of its shares were costing 14.1 which amounts to a total of $126.9 million. 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)
Some theories of the Capital assets pricing model, have been applied in relation to heterogeneous beliefs (Merton, 1987) and risk free lending rate elimination (Black, 1972)
Ford Executive Summary
Ford Motor Group is a Gross Profit 7.9% in 2013 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)
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)
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) The net assets 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 is 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.
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