Introduction Ford Motor Company Ford Motor Company, the first major car manufacturer in the United States founded by Henry Ford in 1903, is the world’s fifth largest automaker and is an American multinational corporation. Ford has invested in various global markets over the years. Among the product lines that Ford has invested in are Ford, Lincoln and Mercury based primary in the US and Volvo, Mazda, Aston Martin, Jaguar and Land Rover which are all international brands.
This American multinational corporation also invests in NASCAR where it is one of four manufactures in the Sprint Cup Series, Nationwide Series, and Craftsman Truck Series and offers auto loans thru Ford Motor Credit and PRIMUS Financial Services. Based on global revenues in 2011 Fortune 500 listed Ford as the tenth-ranked American-based Company. History Initially Ford only produced US models of Ford, Lincoln, and Mercury and sold those models globally. This was not that successful, so in turn Ford started producing and selling products that meet the needs of supply and demand and had the potentially of making Ford a global competitor.
The global investments of this company has enable them to own one-third of Mazda located in Japan, a small holding in former subsidiary Aston Martin of England, be able to sell Jaguar and Land Rover to Tata Motors of India for 2. 3 billion dollars and to extend lines of credit to dealerships selling Ford Motor Company products and provide private-label financing to other Ford owned brands such as Mazda, Jaguar, Volvo, and Land Rover. Ford survived the great depression and many other financial crises.
In 2011 Ford discontinued its Mercury division, completed the sale of Volvo, divested its Mazda shares, and saw sales jump 17%. Ford manufactures or distributes automobiles across six continents. It currently employs about 163,000 People and has 70 plants. Ford Motor Company has always been an innovator in the field of automotive technology, introducing products like the fuel-saving Fusion and C-MAX hybrids. The introduction of this new fuel saving device is just another example of Ford’s commitment to excellence.
Justification The risk-free rate of return on assets is the theoretical rate of return of an investment with zero risk. The risk-free rate represents the interest an investor would expect from an absolutely risk-free investment over a specified period of time. The current rate of return on risk free assets is 2. 21% (see appendix B) Beta is a measure of a stock’s volatility in relation to the market and is a key component for the capital asset pricing model.
It is important for companies to know their own standing in the market to determine their ability to raise capital for new projects without for themselves. According to Yahoo Financial the beta for ford is 1. 56. (See appendix B). Although independent auditors are a good source of information for consumers who are looking for stocks to invest in, they do not conduct the assessment of the company; rather they verify the reports that have been submitted by the company. The report is only an opinion on whether the information presented is correct and free from material misstatement.
The unqualified opinion of yahoo financial indicates four things, (1) The Financial Statements have been prepared using the Generally Accepted Accounting Principles which have been consistently applied; (2) The Financial Statements comply with relevant statutory requirements and regulations; (3) There is adequate disclosure of all material matters relevant to the proper presentation of the financial information subject to statutory requirements, where applicable; (4) Any changes in the accounting principles or in the method of their application and the effects thereof have been properly determined and disclosed in the Financial Statements.
The required return on assets has become harder to calculate because of the amounts of data that is available for investors to review. Understanding the required return helps managers set pricing, determine the viability of projects and make capital budgeting decisions. For investors, the required return is used to measure whether an investment will be profitable enough based on the amount of risk incurred. Every investment has an implied risk. The required rate of return is used to determine if the reward is worth the risk.
If the current liabilities were increased by $10,000,000 the required returned on equity would be 34. 19% (appendix B). If Ford decides to fund this project by borrowing from a bank it can expect to pay the prime rate, which is the interest rate that commercial banks charge their most credit-worthy customers. The prime interest rate, or prime lending rate, is largely determined by the federal funds rate, which is the overnight rate which banks lend to one another. The current prime rate as reported by Yahoo finance is 3. 25% The actual rate of return earned on a project is called Internal Rate of Return (IRR).
The Internal Rate of Return is the discount rate where the total present value of cash outflows equals the total present value of cash inflows. (see appendix B) I would recommend that Ford proceeds with this project. The addition of the fuel saver device would allow Ford to move into markets that were not previously open to them because their vehicles do not meet the minimal miles per gallon standard. The Corporate Average Fuel Economy (CAFE) standards that regulate the average fuel economy in the vehicles produced by each major automaker in the US is currently 27.
5 miles per gallon for cars and 22. 2 miles per gallon for light trucks such as minivans, sport utility vehicles, and pickups. Europe currently requires 40 miles per gallon average fuel economy and will soon push up to 49 miles per gallon, while Japan is expected to reach 47 miles per gallon by 2015. According to an article in new 1. com “The Western European market continues to be very challenging for mass-market manufacturers, and Ford’s sales in the region declined significantly last year.
In 2012, wholesales in Ford’s European segment (including some joint venture sales) declined 16 percent, while revenue in the segment fell 21 percent. Ford’s market share in the region fell 140 basis points to 7. 9 percent as the company attempted to avoid discounting and, in the fourth quarter, cut production to reduce dealer inventories. In October 2012, Ford announced several significant restructuring actions to improve its European cost structure, including the planned closure of two plants in the U. K. in 2013 and the planned closure of its assembly plant in Genk, Belgium in 2014.
The plant closures will result in an 18 percent decline in Ford’s installed vehicle assembly capacity in the region and will generate estimated gross cost savings of $450 million to $500 million annually. Ford also plans to strengthen its market position by introducing 15 new vehicles in the region by 2017. The combination of market weakness and the significant restructuring actions will drive heavy losses in Ford’s European segment over the next two years, with Ford currently projecting that it will incur an approximately $2 billion pre-tax loss in Europe in 2013, slightly worse than its loss in 2012.
By mid-decade, these restructuring actions could help Ford to earn a pre-tax profit in the region, although this will also require some improvement in market conditions, as well”. The introduction of this new device and the increased fuel efficiency could possibly boost sales and provide other options besides plant closures. I feel the best option for raising capital for this project is the issuing of preferred stock. Although there are many financing options available to finance this project after a review of the pros and cons preferred stock was the best choice.
Preferred stock would be more attractive to investors because preferred shareholders have priority over common stockholders on earnings and assets in the event of liquidation and they have a fixed dividend paid before common stockholders. Common stock would also raise the need funds and would not require a dividend to be paid, but Common stockholders are on the bottom of the priority ladder for ownership structure. In the event of liquidation, common shareholders have rights to a company’s assets only after bondholders, preferred shareholders and other debt holders have been paid in full.
Holders of common stock exercise control by electing a board of directors and voting on corporate policy. They could in turn vote down the project that is being funded. A bank loan would also be a good option to raise the need capital but lone also come with interest, which would increase the liabilities. Ford could raise the needed funds by offering a mix of preferred and common stock, because each is attractive to a different group of investors. They could limit the amount of common stock so that no control of leadership is changed and use preferred stock to raise the rest.
As reported by Ford in their first quarter pre-tax profit reportFord Credit Reports First Quarter Pre-tax Profit of $507 Million; Net Income of $364 Million*DEARBORN, Mich. , April 24, 2013 – Ford Motor Credit Company reported a pre-tax profit of$507 million in the first quarter of 2013, compared with $452 million a year earlier. The increase in pre-tax earnings is primarily explained by higher receivables and favorable residual performance, offset partially by lower credit loss reserve reductions.
Ford Credit’s net income was $364 million in the first quarter, compared with $295 million in the previous year. “We are pleased with our first quarter results, and we are on track for the full year profit target we outlined previously,” Ford Credit Chairman and CEO Bernard Silverstone said. “By delivering a full range of financing products and executing our business fundamentals in both growing and challenged markets, we continue to produce solid results. ”On March 31, 2013, Ford Credit’s net receivables totaled $93 billion, compared with $90 billion at year-end 2012.
Managed receivables were $94 billion at March 31, 2013, up from $91 billion at year end. Managed leverage was 8. 4:1 at March 31, 2013, compared with 8. 3:1 at year end. Ford Credit continues to expect full year 2013 pre-tax profits to be about equal to 2012, year-endmanaged receivables in the range of $95 billion to $105 billion, and planned distributions of about $200 million for the year. | | | | | There are many things that can be done to maintain or even lower the price of manufacturing the new vehicles; a good recommendation would be to offer a profit sharing program to the employees.
This would help keep the price of manufacturing vehicles down and if the employees feel that they have a stake in the company than they would be more likely to take a pay cut or forgo this year’s cost of living allowance if it would help the company. Petitioning the government to lower the tax on gas would lower the price of gas and give consumers more disposable income. This would also revitalize the SUV and pickup truck demand and greatly increase profits.
There was a bill that proposes a $3,000-to-$5,000-per-vehicle tax credit for buyers of plug-in hybrids which could have further stimulated demand for advanced vehicles but was struck from the bill at the last minute, along with a tax hike for oil producers that would have funded it. A bill such as this for vehicles that exceed the current CAFE also help to offset the additional $2,5000 that would be to the price tag of new cars References Ford Motor Co. (2013). Financial Reports. Retrieved May 2, 2013 from http://corporate. ford.
com/our-company/investors/investor-quarterly-results Ford Motor Co. (2013). Climate Change and the Environment. Retrieved May 10, 2013 from http://corporate. ford. com/microsites/sustainability-report-2011-12/environment Hoffman, Derek. (2013). Ford Motor Earnings Preview: Can this Streak Continue. Retrieved on May 10, 2013 from http://wallstcheatsheet. com/stocks/ford-motor-earnings-preview-can-this-streak-continue. html/ Yahoo Finance. (2013). Ford Motor Co. Retrieved May 2, 2013 from: http://finance. yahoo. com/q/ks? s=F Appendix A | | | Income Statement| All numbers in thousands|
Period Ending| Mar 30, 2013| Dec 30, 2012| Sep 29, 2012| Jun 29, 2012| Total Revenue | 35,810,000 | 36,424,000 | 32,172,000 | 33,211,000 | Cost of Revenue| 30,711,000 | 31,412,000 | 26,543,000 | 26,863,000 | | Gross Profit | 5,099,000 | 5,012,000 | 5,629,000 | 6,348,000 | | | Operating Expenses| | Research Development| – | – | – | – | | Selling General and Administrative| 3,285,000 | 6,523,000 | 2,909,000 | 2,987,000 | | Non Recurring| 40,000 | 62,000 | 57,000 | (17,000)| | Others| – | – | – | – | | | | Total Operating Expenses| – | – | – | – | | | |
| | Operating Income or Loss | 1,774,000 | (1,573,000) | 2,663,000 | 3,378,000 | | | | | Income from Continuing Operations| | | Total Other Income/Expenses Net| 341,000 | 905,000 | 416,000 | (72,000)| | | Earnings Before Interest And Taxes| 2,329,000 | (405,000)| 3,208,000 | 3,407,000 | | | Interest Expense| 206,000 | (2,246,000)| 962,000 | 1,812,000 | | | Income Before Tax| 2,123,000 | 1,841,000 | 2,246,000 | 1,595,000 | | | Income Tax Expense| 511,000 | 246,000 | 613,000 | 557,000 | | | Minority Interest| (1,000)| 3,000 | (2,000)| 2,000 | | | |
| Net Income From Continuing Ops| 1,825,000 | 1,861,000 | 1,760,000 | 1,141,000 | | | | | Non-recurring Events| | | Discontinued Operations| – | – | – | – | | | Extraordinary Items| – | – | – | – | | | Effect Of Accounting Changes| – | – | – | – | | | Other Items| – | – | – | – | | | | | | Net Income | 1,611,000 | 1,598,000 | 1,631,000 | 1,040,000 | | Preferred Stock And Other Adjustments| – | – | – | – | | | | Net Income Applicable To Common Shares | 1,611,000 | 1,598,000 | 1,631,000 | 1,040,000 | | | | | |
————————————————- Top of FormBalance Sheet| Bottom of Form| | | All numbers in thousands| Period Ending| Mar 30, 2013| Dec 30, 2012| Sep 29, 2012| Jun 29, 2012| | Assets| Current Assets| | Cash And Cash Equivalents| 13,820,000 | 15,659,000 | 13,539,000 | 15,101,000 | | Short Term Investments| 20,521,000 | 20,284,000 | 21,996,000 | 20,499,000 | | Net Receivables| 83,207,000 | 82,338,000 | 79,069,000 | 78,254,000 | | Inventory| 8,423,000 | 7,362,000 | 8,208,000 | 7,289,000 | | Other Current Assets| – | – | – | – | |
Total Current Assets | 125,971,000 | 125,643,000 | 122,812,000 | 121,143,000 | Long Term Investments| 3,291,000 | 3,246,000 | 2,716,000 | 2,938,000 | Property Plant and Equipment| 43,631,000 | 41,393,000 | 40,464,000 | 37,985,000 | Goodwill| – | – | – | – | Intangible Assets| 84,000 | 87,000 | 89,000 | 95,000 | Accumulated Amortization| – | – | – | – | Other Assets| 5,554,000 | 5,000,000 | 5,073,000 | 5,011,000 | Deferred Long Term Asset Charges| 14,479,000 | 15,185,000 | 13,526,000 | 14,064,000 | | Total Assets | 193,010,000 | 190,554,000 | 184,680,000 | 181,236,000 | |
Liabilities| Current Liabilities| | Accounts Payable| 67,054,000 | 68,715,000 | 64,277,000 | 63,665,000 | | Short/Current Long Term Debt| – | – | – | – | | Other Current Liabilities| – | – | – | – | | Total Current Liabilities | 67,054,000 | 68,715,000 | 64,277,000 | 63,665,000 | Long Term Debt| 107,356,000 | 105,058,000 | 100,604,000 | 99,897,000 | Other Liabilities| – | – | – | – | Deferred Long Term Liability Charges| 638,000 | 470,000 | 593,000 | 595,000 | Minority Interest| 43,000 | 42,000 | 45,000 | 43,000 | Negative Goodwill| – | – | – | – | |
Total Liabilities | 175,091,000 | 174,285,000 | 165,519,000 | 164,200,000 | | Stockholders’ Equity| Misc Stocks Options Warrants| 324,000 | 322,000 | 320,000 | – | Redeemable Preferred Stock| – | – | – | – | Preferred Stock| – | – | – | – | Common Stock| 40,000 | 40,000 | 39,000 | 39,000 | Retained Earnings| 19,296,000 | 18,077,000 | 16,670,000 | 15,230,000 | Treasury Stock| (302,000)| (292,000)| (258,000)| (225,000)| Capital Surplus| 21,094,000 | 20,976,000 | 20,931,000 | 20,920,000 | Other Stockholder Equity| (22,533,000)| (22,854,000)| (18,541,000)| (18,928,000)| |
Total Stockholder Equity | 17,595,000 | 15,947,000 | 18,841,000 | 17,036,000 | | Net Tangible Assets | 17,511,000 | 15,860,000 | 18,752,000 | 16,941,000 | | | | | Cash Flow| | | View: Annual Data | Quarterly Data| All numbers in thousands| Period Ending| Mar 30, 2013| Dec 30, 2012| Sep 29, 2012| Jun 29, 2012| Net Income | 1,611,000 | 1,598,000 | 1,631,000 | 1,040,000 | | Operating Activities, Cash Flows Provided By or Used In| Depreciation| – | – | – | – | Adjustments To Net Income| – | – | – | – | Changes In Accounts Receivables| – | – | – | – | Changes In Liabilities| – | – | – | – |
Changes In Inventories| – | – | – | – | Changes In Other Operating Activities| – | – | – | – | | Total Cash Flow From Operating Activities | 211,000 | (361,000) | 3,427,000 | 3,904,000 | | Investing Activities, Cash Flows Provided By or Used In| Capital Expenditures| (1,483,000)| (1,885,000)| (1,319,000)| (1,191,000)| Investments| (2,543,000)| (294,000)| (3,623,000)| (1,689,000)| Other Cash flows from Investing Activities| 175,000 | 512,000 | (132,000)| (158,000)| | Total Cash Flows From Investing Activities | (3,851,000) | (1,667,000) | (5,074,000) | (3,038,000) | |
Financing Activities, Cash Flows Provided By or Used In| Dividends Paid| (392,000)| (191,000)| (191,000)| (191,000)| Sale Purchase of Stock| (10,000)| (33,000)| (33,000)| (32,000)| Net Borrowings| 2,266,000 | 4,314,000 | 75,000 | (458,000)| Other Cash Flows from Financing Activities| 103,000 | (3,000)| 114,000 | (36,000)| | Total Cash Flows From Financing Activities | 1,967,000 | 4,087,000 | (35,000) | (717,000) | Effect Of Exchange Rate Changes| (166,000)| 61,000 | 120,000 | (292,000)| | Change In Cash and Cash Equivalents | (1,839,000) | 2,120,000 | (1,562,000) | (143,000)|
| | | | Appendix B Financial Highlights| | Fiscal Year| Fiscal Year Ends:| Dec 30| Most Recent Quarter (mrq):| Mar 31, 2013| | Profitability| Profit Margin (ttm):| 4. 27%| Operating Margin (ttm):| 4. 83%| | Management Effectiveness| Return on Assets (ttm):| 2. 21%| Return on Equity (ttm):| 33. 97%| | Income Statement| Revenue (ttm):| 137. 62B| Revenue Per Share (ttm):| 35. 79| Qtrly Revenue Growth (yoy):| 10. 40%| Gross Profit (ttm):| 21. 67B| EBITDA (ttm)6:| 12. 00B| Net Income Avl to Common (ttm):| 5. 88B| Diluted EPS (ttm):| 1. 48| Qtrly Earnings Growth (yoy):| 15.
40%| | Balance Sheet| Total Cash (mrq):| 24. 18B| Total Cash Per Share (mrq):| 6. 15| Total Debt (mrq):| 107. 60B| Total Debt/Equity (mrq):| 599. 03| Current Ratio (mrq):| 1. 64| Book Value Per Share (mrq):| 4. 48| | Cash Flow Statement| Operating Cash Flow (ttm):| 7. 18B| Levered Free Cash Flow (ttm):| 2. 21B| | Valuation Measures| | Market Cap (intraday)5:| 55. 47B| Enterprise Value (May 12, 2013)3:| 138. 89B| Trailing P/E (ttm, intraday):| 9. 57| Forward P/E (fye Dec 31, 2014)1:| 8. 50| PEG Ratio (5 yr expected)1:| 0. 97| Price/Sales (ttm):| 0. 41|
Price/Book (mrq):| 3. 17| Enterprise Value/Revenue (ttm)3:| 1. 01| Enterprise Value/EBITDA (ttm)6:| 11. 58| | Trading Information| | Stock Price History| Beta:| 1. 56| 52-Week Change3:| 36. 72%| S&P500 52-Week Change3:| 22. 07%| 52-Week High (Jan 17, 2013)3:| 14. 30| 52-Week Low (Aug 2, 2012)3:| 8. 82| 50-Day Moving Average3:| 13. 32| 200-Day Moving Average3:| 12. 61| | Share Statistics| Avg Vol (3 month)3:| 34,941,700| Avg Vol (10 day)3:| 38,741,800| Shares Outstanding5:| 3. 93B| Float:| 3. 57B| % Held by Insiders1:| 0. 41%| % Held by Institutions1:| 55. 20%|
Shares Short (as of Apr 30, 2013)3:| 70. 53M| Short Ratio (as of Apr 30, 2013)3:| 1. 90| Short % of Float (as of Apr 30, 2013)3:| 2. 00%| Shares Short (prior month)3:| 66. 21M| | Dividends & Splits| Forward Annual Dividend Rate4:| 0. 40| Forward Annual Dividend Yield4:| 2. 80%| Trailing Annual Dividend Yield3:| 0. 30| Trailing Annual Dividend Yield3:| 2. 10%| 5 Year Average Dividend Yield4:| 3. 00%| Payout Ratio4:| 17. 00%| Dividend Date3:| Jun 2, 2013| Ex-Dividend Date4:| May 1, 2013| Last Split Factor (new per old)2:| 2:1| Last Split Date3:| Jul 6, 1994| |