Ford

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Ford

  1. 1. Ford Motor Co Phillips Ngo Thai Pham Carol Linh Cha Xiaohan Jia Hsiao Hsuen Brian Tyson
  2. 2. CONTENTS: 1. Company Information………………………………………………3 • Company Background/History……………………………...3 • Composition of the Board and Suggestion………………..4 • Sales Distribution………………..…………………………..7 • Industry Comparison….………………..……………………8 • Worldwide Vehicle Unit Sales………………..…………….9 • Market Revenue………………..………………..…………10 • Company Brands………………..………………..………..11 2. Financial Ratio………………..………………..………………….12 3. Company’s Share & Trading Information……………………….14 4. Holding Period Return………………..…………………………..14 5. Free Cash Flow and Cost of Equity .………………..………….15 6. Market Efficiency………………..………………..……………….16 7. Risk Analysis………………..………………..……………………18 8. Cost of Capital and Optimal Capital Structure…………………19 9. Optimal Capital Structure ………………………………………..21 10.Conclusion………………..………………..………………..…….22 11. Reference………………..………………..……………………….23 2
  3. 3. Company History The Dream Becomes a Business Ford Motor Company entered the business world on June 16, 1903, when Henry Ford and 11 business associates signed the company’s articles of incorporation. With $28,000 in cash, the pioneering industrialists gave birth to what was to become one of the world’s largest corporations. Few companies are as closely identified with the history and development of industry and society throughout the 20th century as Ford Motor Company. As with most great enterprises, Ford Motor Company’s beginnings were modest. The company had anxious moments in its infancy. The earliest record of a shipment is July 20, 1903, approximately one month after incorporation, to a Detroit physician. With the company’s first sale came hope—a young Ford Motor Company had taken its first steps. Mass Production on the Line Perhaps Ford Motor Company’s single greatest contribution to automotive manufacturing was the moving assembly line. First implemented at the Highland Park plant (in Michigan, US) in 1913, the new technique allowed individual workers to stay in one place and perform the same task repeatedly on multiple vehicles that passed by them. The line proved tremendously efficient, helping the company far surpass the production levels of their competitors—and making the vehicles more affordable. The First Vehicles Henry Ford insisted that the company’s future lay in the production of affordable cars for a mass market. Beginning in 1903, the company began using the first 19 letters of the alphabet to name new cars. In 1908, the Model T was born. 19 years and 15 million Model T’s later, Ford Motor Company was a giant industrial complex that spanned the globe. In 1925, Ford Motor Company acquired the Lincoln Motor Company, thus branching out into luxury cars, and in the 1930’s, the Mercury division was created to establish a division centered on mid-priced cars. Ford Motor Company was growing. Becoming a Global Company In the 50’s came the Thunderbird and the chance to own a part of Ford Motor Company. The company went public and, on Feb. 24, 1956, had about 350,000 new stockholders. Henry Ford II’s keen perception of political and economic trends in the 50’s led to the global expansion of FMC in the 60’s, and the establishment of Ford of Europe in 1967, 20 years ahead of the European Economic Community’s arrival. The company established its North American Automotive Operations in 1971, consolidating U.S., Canadian, and Mexican 3
  4. 4. operations more than two decades ahead of the North American Free Trade Agreement. Ford Motor Company started the last century with a single man envisioning products that would meet the needs of people in a world on the verge of high- gear industrialization. Today, Ford Motor Company is a family of automotive brands consisting of: Ford, Lincoln, Mercury, Mazda, Jaguar, Land Rover, Aston Martin, and Volvo. The company is beginning its second century of existence with a worldwide organization that retains and expands Henry Ford’s heritage by developing products that serve the varying and ever-changing needs of people in the global community. Sir John R.H. Bond, 59, is group chairman, HSBC Holdings plc, London, United Kingdom. He joined The Hongkong and Shanghai Banking Corporation in 1961 and served as executive director 1988-1992. From 1991-1993, he was president and chief executive Sir John R. officer of Marine Midland Bank, Inc., now HSBC USA, Inc. He H. Bond served as group chief executive of HSBC Holdings 1993-1998 3, 4* before being named its group chairman in 1998. In 1999, Queen Annual Elizabeth II knighted him for his services to the banking industry. He Income: NA joined Ford’s board in 2000. Michael D. Dingman, 69, is president and chief executive officer of Shipston Group, Ltd., a diversified international holding company. In addition, he is the former chairman and current board member of Fisher Scientific International, a leader in serving science, providing Michael D. products and services to research, health care, industry, education Dingman and governments worldwide. Mr. Dingman joined Ford’s board in 2, 3, 4* 1981 and is chairman of the board’s Compensation Committee. Annual Income: NA Edsel B. Ford II, 52, is a retired vice president of Ford Motor Company and former president and chief operating officer of Ford Credit. He joined Ford in 1974 and was elected to its board of directors in 1988. Mr. Ford held numerous positions in the Edsel B. company’s Ford and Lincoln Mercury divisions and served in Ford Ford II Australia before being named to his Ford Credit post in 1991. Mr. 3, 4, 5* Ford presently is a consultant to the company and serves as the Annual primary liaison to the National Automobile Dealers Association. Mr. Income: NA Ford is also a board director of the Detroit Branch of the Chicago Federal Reserve Bank and the Skillman Foundation. 4
  5. 5. William Clay Ford, 76, is retired chairman of Ford’s Finance Committee and owner and president of The Detroit Lions, Inc. He William Clay was elected a Ford director in 1948 and began his employment with Ford the company in 1949. Throughout his career at Ford, he held 3, 4* numerous executive positions and in 1978 became chairman of the Annual board’s Executive Committee and was named a member of the Income: NA Office of the Chief Executive. In 1980, Mr. Ford was elected vice chairman of the board, and in 1987, he was elected chairman of the Finance Committee. Mr. Ford retired from his post as vice chairman in 1989 and as chairman of the Finance Committee in 1995. William Clay Ford, Jr., 43, is chairman of the board of directors and several of its committees. He also is vice chairman of The Detroit Lions, Inc. Mr. Ford began his employment with the company in 1979 and was elected a company director in 1988. He William Clay held a number of management positions at Ford, including Ford, Jr. international assignments, before being elected vice president, 3, 4, 5* Commercial Truck Vehicle Center in 1994. Mr. Ford held that Annual position until 1995 when he was named chairman of the board’s Income: Finance Committee. He was named chairman of the board’s $219K Environmental and Public Policy Committee in 1997 and became chairman of the Board of Directors and chairman of the Nominating and Governance Committee January 1, 1999. Irvine O. Hockaday, Jr., 64, is president and chief executive officer of Hallmark Cards, Inc. He joined Hallmark in 1983 as its executive vice president and was named to his current post in 1986. He was elected a Hallmark director in 1978 and is also a director of Crown Irvine O. Media Holdings, Inc. He was elected a Ford director in 1987 and is Hockaday, chairman of the board’s Audit Committee. Jr. 1, 4* Annual Income: NA Marie-Josée Kravis, 51, is a senior fellow of the Hudson Institute Inc., a position she has held since 1994. Prior to that and since 1978, she served as the executive director of the Hudson Institute of Canada. From 1973 to 1976 she was an economist with the Marie-Josée Hudson Institute (USA). Ms. Kravis joined the Ford board of Kravis directors in 1995 2, 4* Annual Income: NA 5
  6. 6. OFFICERS Income Pay Exercised William Ford, Jr., 45 $ 219.00K N/A Chairman, CEO Nicholas Scheele, 59 $ 2.22M N/A Pres, COO, Director Allan Gilmour, 68 N/A N/A Vice Chairman Don Leclair, 51 N/A N/A CFO, Group VP James Padilla, 56 $ 1.54M N/A Exec. VP and Pres, North America Dollar amounts are as of 31-Dec-02 and compensation values are for the last fiscal year ending on that date. “Pay” is salary, bonuses, etc. “Exercised” is the value of options exercised during the fiscal year. Major Holders BREAKDOWN % of Shares Held by All Insider and 5% Owners: 1% % of Shares Held by Institutional & Mutual Fund Owners: 36% % of Float Held by Institutional & Mutual Fund Owners: 36% Number of Institutions Holding Shares: 10 TOP INSIDER & RULE 144 HOLDERS Holder Shares Reported FORD, WILLIAM CLAY 8,067,222 1-Dec-03 FORD, WILLIAM C. JR. 2,729,019 31-Dec-02 FORD, EDSEL B. II 2,031,235 31-Dec-03 REICHARDT, CARL E. 534,616 31-Jul-03 GILMOUR, ALLAN D. 486,440 21-May-03 Ford insiders and 5% owners hold only 1% of the total stock shares. This is a good strategy because we don’t want to have insiders to hold more than 5% of a publicly traded stock. It shows diversification on Ford’s behalf. 6
  7. 7. Sales distribution 100.00 80.00 59.1 59.9 62.3 63.4 60.00 Trucks 40.00 Cars 20.00 40.9 40.1 37.7 36.6 0.00 1999 2000 2001 2002 Ford’s Statistics showed that the percentages of trucks sold have been increasing every year since 1999, up until 2002 compared to cars, this is probably because of the popularity of the F-150, the Expedition, and the Explorer . Cars sales had decreased from 1999’s 40.9% to 2002’s 36.6% (Source: 10-K file) 7
  8. 8. Industry Comparison Automotive comparison 11% 4% Toyota Motor 5% 30% Nissan TOYOTA DaimlerChrysler 7% FORD MOTOR Honda General Motors Ford Motor 7% Volkswagen Volvo Others 11% 13% Out of 378,909 cars sold 12% Toyota Motors still holds a commanding lead in sales the industry, with 30%. Ford’s 7% of the Industry’s sales is still a major competitor as is Nissan, Chrysler, Honda, GM, etc. (Source: Market Guide) 8
  9. 9. Worldwide Vehicle Unit Sales (in thousands) 5000 4933 4787 4500 4402 4292 4000 3500 North America 3000 2500 Europe 2161 2000 2003 1882 1960 1500 Other 1000 International 568 555 609 473 500 0 2002 2001 2000 1999 Most of Ford’s revenue comes from its domestic market: North America, then Europe. Asian market comes in last. For Example, in 2002, North America’s Net Vehicle Unit Sales is 4402 thousand, Europe’s Net Vehicle Unit Sales were 2003 thousand, other international area had a Net Vehicle Unit Sales of 568 thousand. (Source: 10-K file) 9
  10. 10. Market Revenue (in billions) 185,524.00 200,000.00 169,794.91 164,196.00 General Motors 150,948.33 150,000.00 DaimlerChrysler 106,766.31 Ford Motor 100,000.00 74,771.23 Toyota Motor Volkswagen 50,000.00 Honda Motor 0.00 Sales Even though Ford comes in third place in Market Revenue, its net income is still lower than Toyota Motors because Ford needs to cover higher production cost and interest payments. GM brings in the most market revenue with 185,524 billion in sales. Surprisingly, Honda only brought in 74,771 billion in sales. (Source: Market Guide) 10
  11. 11. Company Brands Automotive Brand Ford Lincoln Mercury Mazda Volvo Jaguar Land Rover Aston Martin Automotive Service Brands (Source: Ford.com) Ford’s business is mostly rooted in automotive industry. Their automotive brands include Ford, Lincoln, Mercury, Mazda, Volvo, Jaguar, Land Rover, and Aston Martin. To accompany its primary business, Ford also developed Ford credit, Motorcraft, and Hertz. Below is a chart showing the sales from each automotive brand. As you can see, the Ford cars sale a great amount more than the rest of the automotive brands. Internal Sales Land Rover 3,025 Volvo 10,615 Jaguar 4,037 Individual companies Mercury 15,689 Lincoln 11,888 Ford 210,279 0 50000 100000 150000 200000 250000 (Source: www.autochannel .com) 11
  12. 12. Financial Ratios Media General Industry: Auto Manufacturers – Major Computed ratios are based on latest 12 months’ results. Growth Rates % Company Industry S&P 500 Sales (Qtr vs year ago qtr) 10.60 25.60 5.40 EPS (YTD vs YTD) 3,350.00 34.50 22.80 EPS (Qtr vs year ago qtr) NA -17.80 1,128.40 Sales (5-Year Annual Avg.) 1.76 1.83 4.64 EPS (5-Year Annual Avg.) NA -17.00 -12.55 Dividends (5-Year Annual Avg.) -29.96 -1.90 0.87 Ford Motor Co. has much lower sales (QTR vs year ago qtr) than the industry(WEAK). This is probably because the revenue growth of competitors such as DaimlerChrysler AG and General Motors Corp were much higher than Ford’s. The 5-year annual average on sales is close to the industries average but well below the S&P 500 average. (WEAK) Price Ratios Company Industry S&P 500 Current P/E Ratio 28.8 19.2 41.0 P/E Ratio 5-Year High NA 87.5 64.8 P/E Ratio 5-Year Low NA 9.4 25.6 Price/Sales Ratio 0.16 0.43 1.71 Price/Book Value 3.22 2.29 3.57 Price/Cash Flow Ratio 1.60 4.70 19.20 The current P/E ratio for Ford is higher than the industry but much lower than the S&P average. (WEAK)This is probably because Ford has a much lower earnings per share than Toyota and GM. The price/book value of Ford is relatively close to the industry and the S&P 500. WEAK Profit Margins % Company Industry S&P 500 Gross Margin 29.5 29.1 47.0 Pre-Tax Margin 1.5 3.2 7.7 Net Profit Margin 0.5 2.0 4.3 5Yr Gross Margin (5-Year Avg.) 27.6 28.2 47.3 5Yr PreTax Margin (5-Year Avg.) 2.7 3.1 8.6 5Yr Net Profit Margin (5-Year Avg.) 0.7 1.8 5.0 Although Ford’s gross margin is similar to the industry’s gross margin, it is considerably lower than the S&P 500. This shows Ford’s inefficiency in costs in relation to the revenue the company brings in. I would give Ford a FAIR rating for profit margin because the industry in general is much lower than the S&P 500. Also, the net profit margin is below both the industries and S&P 500 again 12
  13. 13. displaying Ford’s high costs, its overall profit margin percentages are weak. WEAK Financial Condition Company Industry S&P 500 Debt/Equity Ratio 22.01 3.21 1.00 Current Ratio 2.0 1.8 1.5 Quick Ratio 1.5 1.3 1.1 Interest Coverage 1.3 2.2 2.5 Leverage Ratio 37.9 8.1 6.1 Book Value/Share 4.47 14.18 10.23 Ford’s debt/equity ratio and leverage ratio are both extremely high compared to the industry and the S&P 500, attracting risk neutral (or less risk-adverse) investor. But even with very high debt Ford still has a lower interest coverage than the S&P 500 and the industry. Meaning that Ford is weaker at paying the interest on the debt even though it has a huge debt (WEAK). The current ratio of Ford is slightly higher than the industry and the S&P 500 meaning Ford is a little more liquid (FAIR). Investment Returns % Company Industry S&P 500 Return On Equity 9.3 10.9 8.9 Return On Assets 0.2 1.3 1.5 Return On Capital 0.4 2.6 4.4 Return On Equity (5-Year Avg.) 13.7 8.4 10.9 Return On Assets (5-Year Avg.) 0.8 1.2 1.8 Return On Capital (5-Year Avg.) 1.8 2.4 5.4 Ford’s return on equity is very similar to the industry and S&P 500. (FAIR). Also, the return on capital is lower than Industry and S&P 500. It shows that it’s resell of capital assets and securities are low (POOR). Ford also has a lower return on assets than both the industry and the S&P 500, it displays poor use its current assets. Ford probably has too much inventory or warehouses that are not as efficient as the other companies. Management Efficiency Company Industry S&P 500 Income/Employee 2,000 9,000 12,000 Revenue/Employee 469,000 464,000 288,000 Receivable Turnover 1.5 1.9 5.4 Inventory Turnover 13.2 8.7 7.9 Asset Turnover 0.6 0.7 0.3 Ford’s Income/Employee is significantly lower that Industry and S&P 500. But its Revenue/Employee ratio is higher than Industry and S&P 500. It illustrates that the company is efficient in that it gets a lot of revenue out of paying very little to their employees (FAIR). 13
  14. 14. (Source: www.msn.com) Company Share and Trading Information Ford Motor Company Last 13.69 Open 13.84 Change -0.19 Previous Close 13.88 % Change -1.37% Bid NA Ask NA Volume 7.032 Mil Instit. Ownership 35.4% Avg Daily Volume 12.37 Mil 52 Week High 17.34 Day’s High 13.98 Day’s Low 13.61 52 Week Low 6.58 StockScouter Rating 5 Intraday Chart Fundamental Data P/E 28.20 Market Cap. 25.07 Bil Earnings/Share 0.50 # Shares Out. 1.831 Bil fyi Dividend/Share 0.40 Exchange NYSE Current Div. Yield 2.80 Stock Alerts | Message Board (Source: www.yahoo.com) As shown above, the 52 week stock price fluctuated greatly, reaching lows of 6.58 dollars per share all the way up to 17.34 dollars per share. Its trading at a volume of 7 million shares. Holding Period Return 2004 (12/31) 2003 2002 2001 1.Background Analysis: . HPR = (Ending Price – Beginning Price  +Distributions)/ Beginning Price  -0.2213 0.7634 -0.3830             Earnings growth  rate estimate  (12/04) 0.1201 Dividend 0.4 0.4 0.4 1.05 Price 12.06 16 9.3 15.72 HPR -0.2213 0.7634 -0.3830 In the year 2002, Ford suffered a dramatic decrease in stock price, which lead to a negative HPR of -0.3830 in our chart. 14
  15. 15. At the end of 2003, Ford’s stock wrapped up at $16, but at the beginning of 2004, it dropped immediately as stock market opened. We think that Ford wanted to end with a good impression on the stockholders in 2003. Therefore, they manipulated the stock price to end 2003 in a positive HPR, this caught up with them in 2004 as they once again had a negative HPR. . Although Ford had a positive earnings growth rate in 2004, the HPR was negative because of the price decline from 2003 to 2004. 15
  16. 16. Free Cash Flow and Cost of Equity 2.Free Cash Flow and Cost of Equity: .FCFE 2004 2003 2002 2001 NI 495 -980 -5,453 (+)Deprecitaion 11,615 12,676 15,453 (-)Capital Expenditures 7,400 6,776 6,301 (-)∆ in working capital -3995 6,906 -6,086 (+) ∆ in long-term debt 5,380 140 1,698 FCFE 15,777 14,085 -1,846 11,483 (Mil) (Mil) (Mil) (Mil) Note: Capital Expenditures 7,400 6,776 6,301 Additions to property, plant, and equipment (-) Disposition of property and equipment ∆ in working capital = [(CA 02)-(CA01)]-[(CL02)-(CL01)] -3995 6,906 -6,086 CA 43,809 40,764 33,007 CL 52,332 45,292 44,441 ∆ in long-term debt =LTD02-LTD01 5,380 140 1,698 LTD 18,987 13,607 13,467 .K (Discounted cash flow (DCF) model) 2004(2/26) 2003 2002 2001 P0=(FCFE1/Shares0)/(Ke0- -1,846,000,00 G1) FCFE 12/31/2004 15,776,608,500 14,085,000,000 0 11,483,000,000 ke0=[(FCFE1/shares0)/P0] +G1 shares outstanding 1,831,000,000 1,720,000,000 1,819,000,000 1,820,000,000 G1=(FCFE1-FCFE0)/FCFE0 G 12/31/2004 0.1201 -8.630010834 -1.160759383 -0.373643157 P 2/26/2004 13.66 16 9.3 15.72 Ke(required return on equity) 0.750875193 0.693377925 -7.797401637 -1.225281375 Po=D1/(ke-G)=>Ke=(D1/Po) +G 0.025 0.043010753 -0.593602326 EX: Ke2001=(D2002/P2001)+g2002; D2002=D2001(1+g2002); g2002=(D2002 - D2001)/D2001 Once again, due to dramatic losses and negative growth rates in 2002 and 2001, we calculated negative Ke of -7.7974 and -1.22528. Since 2003, Ford has been improving efficiency, with a positive Ke of 0.69338. With finally a positive growth rate and the current price, we predict a 0.7509 Ke on 2/26/04. The current model calculating price Po is not realistic. Because it assumes the Ke and the growth rate is constant. When using this model, one needs to watch out for negative signs, because price can never be negative; while FCFE, Ke and Growth rates can be negative. 16
  17. 17. Market Efficiency Analysis Company Specific News (Source: www.msn.com) On Feb 17, 2004, Ford announced an appointment of Stephen G. Butler to its Board of Directors. This company specific news is reflected on the stock chart as the red point. We as a group decided this is good news for the company. But the stock price reacted badly to this news. This does not reflect to any form of the market efficiency because there wasn’t any stabilizing effect for the semi-strong form or any continuous price increase for the weak form. Hence: No Form. Non-Company Specific News (Source: www.msn.com) 17
  18. 18. On March 31, 2004, OPEC announces that it will cut oil production by 1 million barrels a day. This was non-company specific news that reflected as the red point on this chart. We have decided that this is bad news. Ford’s stock price declined briefly but then reacted positively to the news. If we only look at a 3 day period, the chart showed a weak form of market efficiency because the stock price declined both prior and after the event occurred. But we have decided to look at the long term effect of this news. Overall, we conclude that this news has no effect on the stock price because the stock price climbed back up after 2 days. Hence: No Form. Five-Year Stock Analysis (Source: www.msn.com) The chart shows Ford’s 5 year stock behavior. It showed a steady decline starting in Jan 01 due to declined sales in domestic auto market. The pension shortfall in July 02 contributed to the sudden decline in stock price at that time. Since 2001, Ford’s stock price has fluctuated greatly, but mostly in the decline stage. Ford had been struggling recently, but with a company this size; it’s only a matter of time before it climbs back up. 18
  19. 19. Risk Analysis 2004 2003 2002 2001 4. Risk Analysis: Beta FORD 1.1598 1.1422 1.0682 0.956 Beta= COV(RIBM, RS&P500)/VAR(RS&P500) Unlevered Beta 0.052083934 0.071920558 0.41602743 [Equity/(Equity +((1-T)Debt))]* BetaEquity=Beta_unlevered 7,786,000,00 Equity 12,500,000,000 13,600,000,000 0 263,435,000,00 Debt 292,284,000,000 265,862,000,000 0 (6,571,000,000.0 Income from continuing operations before income taxes 1,287,000,000 1,033,000,000 0) (2,097,000,000.0 Provision for income tax 135,000,000 301,000,000 0) Tax rate 0.104895105 0.291384318 0.319129508 2004 2003 2002 2001 .Ke (CAPM) Rf 0.01 0.0102 0.0163 0.0386 Ke= Rf + Beta(Rm- Rf) Rm-Rf 0.0133 0.3206 -0.2261 -0.1511 Beta 1.1598 1.1422 1.0682 0.956 http://mba.tuck.dartmouth.edu/pages/faculty/ken.french/data_library.html K(required return on equity) 0.02542534 0.37638932 -0.22522002 -0.1058516 The company is currently underpriced because K( DCF model) > K(CAPM); 0.7508>0.02542 BFord=Cov(Ri, Rm)/σ2 (Rm) Beta (B) is the measure of an asset's risk in relation to the market. Though having a very high amount of debt, Ford’s Beta is moderately low (1.1422 in 2003) which should be fairly attractive to risk-adverse investors. Figures At-A-Glance P/E ttm (trailing 12 mos.) 26.52 P/Sales ttm .15 EPS actual ttm $0.50 Avg EPS Est Current $0.44 Avg EPS Est 4 wks ago $0.44 Beta 1.33 Market Cap $24.431b Avg Analysts Rating 3.1 Instit. Ownership 421.6m 23.0% Experts had calculated a 1.33 beta for year 2004, still moderately low with that high amount of debt. Comparing with the Ke calculated in DCF (Discounted Cash Flow) Model with the Ke CAPM model of is significantly lower. This shows the current price we used on 2/26/04 is under-priced. Reasoning: Ke( DCF model) > Ke(CAPM); 19
  20. 20. 0.7508>0.02542. This is good news for the stockholders. The market only requires a 2.54% return, while Ford’s stock will have a return of 75% from the DCF model. According to this comparison, stockholders should definitely invest in Ford’s stock for it will increase. Cost of Capital and Optimal Capital Structure 5. Cost of Capital and Optimal Capital Structure: 2003 2002 2001 .WACC=We*Ke + Wd*kd*(1-T)+ Wp* Kp We= Equity/(Equity+Debt+Preferred Stock) 0.041012652 0.048634132 0.028707217 Wd=Debt/(Equity+Debt+Preferred Stock) 0.958987348 0.950732909 0.971292783 Wp=Preferrd stock/(Equity+Debt+Preferred Stock) 0 0.000580402 0 Ke 0.13 0.11 0.09 Kd 0.033849 0.049395 0.060585 Kp 0 11.8 0 WACC 0.034387432 0.04547612 0.04265 To calculate WACC, we could not have used negative Ke we calculated in all 3 models. So, the Ke in the above chart, we have based them on the amount of debt and beta. With negative growth rates, net losses, high debt, beta, respectively, we have decided 13%, 11%, 9% Ke for the year of 2003, 2002, and 2001. 2003’s Ke being the highest because it has the highest amount of debt and the highest beta among the 3 years. 2003 2002 2001 Interest LTD Interest LTD Interest LTD 0.053 608 0.068 432 0.123 302 0.009 688 0.068 119 0.076 13467 0.007 13832 0.076 13607 0.044 46403 0.065 5155 0.07 150 0.058 105938 0.021 58274 0.043 41529 0.808 1093 0.043 99921 0.048 105682 0.094 843 0.094 843 0.033849 0.049395 0.060585 Kd Kd Kd (2003) (2002) (2001) (Source: 10-K file) The above chart is the calculation of weighted average of cost of debt. Even though Ford has a dangerous amount of debt, but with the low interest rates it could get for the past few years, they could still cover their interest (though not very effectively) and invest their money in new projects. 20
  21. 21. Captial Structure of Ford 4% 1 2 96% Ford’s Capital Structure consists mostly of debt, 96%. For the past three years, each year Ford had incurred debts above 95%. This condition has not changed. To borrow this much money, Ford must be able to cover their interest. But the interest coverage ratio is lower that the Industry standards. Ford could be investing it’s money elsewhere in development (I.E. Ford’s Escape Hybrid). But if Ford does not have high return in their investment, it might be risky for stockowners to invest in Ford. 21
  22. 22. Ford’s capital structure with almost all debt had caused its WACC to be slightly lower than other company’s. According to the chart, the shape of the curve can only represent M&M model III meaning cost structure is containing tax, bankruptcy cost, and agency cost. Also, the optimal cost structure would be at 96%. However, if we want to have an accurate account on the optimal capital structure, we would need to calculate WACC for the past 10 years. Thus, calculating only 3 years of WACC to find optimal cost structure is unrealistic. 22
  23. 23. Conclusion After all the calculations and research, even though Ford had not been performing well, it is still a Fortune 500 company. It’s only a matter of time before it climbs back up on stock prices. Even though, the HPR of Ford is negative for 2004, but currently the stock is underpriced according to our calculation of DCF and CAPM model. Even though, Ford has high debt, high production cost, net losses for 2002 and 2001, low interest coverage (leverage ratio), we still have to praise Ford for maintaining a stable WACC, low cost of debt (Kd), moderately low beta (B). But we as a group rate for as a SELL. Ford has a capital structure which consists of a dangerous amount of debt. It also does not have a high interest coverage ratio. So, unless Ford is doing exceptionally well in investing the money it receives from borrowing it is in dangerous territory with that much debt. If you look at Ford’s return on assets and return on capital it is very low. With this being said, we make the conclusion that Ford is not efficiently using all the money that it is borrowing so it is going to be losing a lot of money on the high interest payments on the debt. Ford Motor Company: Analyst Ratings Zacks average brokerage recommendation is Moderate Sell. Recommendations Current 1 Month Ago 2 Months Ago 3 Months Ago Strong Buy 3 2 2 2 Moderate Buy 0 0 0 0 Hold 5 6 8 7 Moderate Sell 2 2 2 2 Strong Sell 4 4 2 3 Mean Rec. 3.29 3.43 3.14 3.27 (Source: www.msn.com) Then again, If we are assuming the efficient market hypothesis, we might take another stand point on Ford. As we have pointed out, Ford’s financial ratios are weak compared to many of the other company’s in the same industry. Therefore, the stock price of Ford should already reflect the weak performance by Ford in the recent years (which is shown by Ford having a lower stock price than most of the other company’s in the same industry). We feel Ford has a lot of room to improve on in the near future. Ford has lasted as a company since 1903, has always been a strong competitor in the market, and continues to have a wide variety of vehicles. So, we are confident that Ford will work out the inefficiencies. By improving on some of the obvious flaws in the company, Ford’s stock price has plenty of potential to rise. Therefore, assuming EMH, we look at Ford as a BUY. 23
  24. 24. References COV(RFORD, RS&P HPR(FORD) HPR (S&P 500) VAR (RS&P500) Beta FORD Date Close Date Close 500) 200 1-Apr-04 13.67 1-Apr-04 1140.53 0.0073692 0.012715213 0.002743081 0.002365088 1.15982 4 200 1-Mar-04 13.57 1-Mar-04 1126.21 -0.0130909 -0.016358936 0.002796388 0.00244824 1.1422 3 200 2-Feb-04 13.75 2-Feb-04 1144.94 -0.0543329 0.01220903 0.003054001 0.002859039 1.06819 2 200 2-Jan-04 14.54 2-Jan-04 1131.13 -0.09125 0.017276423 0.002497444 0.00261237 0.95601 1 1-Dec-03 16 1-Dec-03 1111.92 0.2121212 0.050765451 3-Nov-03 13.2 3-Nov-03 1058.2 0.088211 0.007128513 1-Oct-03 12.13 1-Oct-03 1050.71 0.1262767 0.054961495 2-Sep-03 10.77 2-Sep-03 995.97 -0.0683391 -0.011944326 1-Aug-03 11.56 1-Aug-03 1008.01 0.045208 0.017873191 1-Jul-03 11.06 1-Jul-03 990.31 0.0063694 0.016213276 2-Jun-03 10.99 2-Jun-03 974.51 0.0466667 0.011332621 1-May-03 10.5 1-May-03 963.59 0.0194175 0.050898661 1-Apr-03 10.3 1-Apr-03 916.92 0.3696809 0.081044118 3-Mar-03 7.52 3-Mar-03 848.18 -0.0961538 0.008357606 3-Feb-03 8.32 3-Feb-03 841.15 -0.0867179 -0.017003623 2-Jan-03 9.11 2-Jan-03 855.7 -0.0204301 -0.027414698 2-Dec-02 9.3 2-Dec-02 879.82 -0.1827768 -0.060332582 1-Nov-02 11.38 1-Nov-02 936.31 0.3451537 0.057057701 1-Oct-02 8.46 1-Oct-02 885.77 -0.1367347 0.086447767 3-Sep-02 9.8 3-Sep-02 815.29 -0.1673747 -0.110013427 1-Aug-02 11.77 1-Aug-02 916.07 -0.1262064 0.00488142 1-Jul-02 13.47 1-Jul-02 911.62 -0.158125 -0.078994959 3-Jun-02 16 3-Jun-02 989.81 -0.0934844 -0.072464719 1-May-02 17.65 1-May-02 1067.14 0.103125 -0.008823748 1-Apr-02 16 1-Apr-02 1076.64 -0.029715 -0.061661684 1-Mar-02 16.49 1-Mar-02 1147.39 0.1081989 0.036738861 1-Feb-02 14.88 1-Feb-02 1106.73 -0.027451 -0.020766236 2-Jan-02 15.3 2-Jan-02 1130.2 -0.0267176 -0.015573828 3-Dec-01 15.72 3-Dec-01 1148.08 -0.1700106 0.007573829 1-Nov-01 18.94 1-Nov-01 1139.45 0.1800623 0.075957734 1-Oct-01 16.05 1-Oct-01 1059.01 -0.074928 0.01735931 4-Sep-01 17.35 4-Sep-01 1040.94 -0.1268244 -0.08172339 1-Aug-01 19.87 1-Aug-01 1133.58 -0.2198665 -0.064108386 2-Jul-01 25.47 2-Jul-01 1211.23 0.0374745 -0.010772447 1-Jun-01 24.55 1-Jun-01 1224.42 0.0082136 -0.025003583 1-May-01 24.35 1-May-01 1255.82 -0.1740163 0.005090199 2-Apr-01 29.48 2-Apr-01 1249.46 0.0483642 0.076814355 1-Mar-01 28.12 1-Mar-01 1160.33 0.0111471 -0.06420472 1-Feb-01 27.81 1-Feb-01 1239.94 -0.01348 -0.092290686 2-Jan-01 28.19 2-Jan-01 1366.01 0.2026451 0.034636592 1-Dec-00 23.44 1-Dec-00 1320.28 0.0303297 0.004053386 1-Nov-00 22.75 1-Nov-00 1314.95 -0.1290199 -0.08006856 2-Oct-00 26.12 2-Oct-00 1429.4 0.0243137 -0.004949496 1-Sep-00 25.5 1-Sep-00 1436.51 0.0541546 -0.053482948 24
  25. 25. 1-Aug-00 24.19 1-Aug-00 1517.68 -0.4804553 0.060699035 3-Jul-00 46.56 3-Jul-00 1430.83 0.0827907 -0.016341262 1-Jun-00 43 1-Jun-00 1454.6 -0.1144975 0.023933549 1-May-00 48.56 1-May-00 1420.6 -0.1130594 -0.021914998 3-Apr-00 54.75 3-Apr-00 1452.43 0.1917719 -0.03079582 1-Mar-00 45.94 1-Mar-00 1498.58 0.1035311 0.096719896 1-Feb-00 41.63 1-Feb-00 1366.42 -0.1632161 -0.020108142 3-Jan-00 49.75 3-Jan-00 1394.46 -0.0667792 -0.050903522 1-Dec-99 53.31 1-Dec-99 1469.25 0.0556436 0.057843921 1-Nov-99 50.5 1-Nov-99 1388.91 -0.0798105 0.019061874 1-Oct-99 54.88 1-Oct-99 1362.93 0.0921393 0.062539467 1-Sep-99 50.25 1-Sep-99 1282.71 -0.0360637 -0.028551738 2-Aug-99 52.13 2-Aug-99 1320.41 0.0748454 -0.006254139 1-Jul-99 48.5 1-Jul-99 1328.72 -0.1406804 -0.032046099 1-Jun-99 56.44 1-Jun-99 1372.71 -0.0120777 0.054438333 3-May-99 57.13 3-May-99 1301.84 -0.1065061 -0.024970416 1-Apr-99 63.94 1-Apr-99 1335.18 0.1278885 0.037943982 1-Mar-99 56.69 1-Mar-99 1286.37 -0.0441747 0.038794182 1-Feb-99 59.31 1-Feb-99 1238.33 -0.034668 -0.032282517 4-Jan-99 61.44 4-Jan-99 1279.64 0.0468564 0.041009412 1-Dec-98 58.69 1-Dec-98 1229.23 0.0659281 0.056375308 2-Nov-98 55.06 2-Nov-98 1163.63 0.0149309 0.059126034 1-Oct-98 54.25 1-Oct-98 1098.67 0.1542553 0.080294196 1-Sep-98 47 1-Sep-98 1017.01 0.0531033 0.062395537 3-Aug-98 44.63 3-Aug-98 957.28 -0.2170175 -0.145796711 1-Jul-98 57 1-Jul-98 1120.67 -0.0338983 -0.011615395 1-Jun-98 59 1-Jun-98 1133.84 0.1372398 0.039438221 1-May-98 51.88 1-May-98 1090.82 0.1325038 -0.018826175 1-Apr-98 45.81 1-Apr-98 1111.75 -0.2931646 0.009076469 2-Mar-98 64.81 2-Mar-98 1101.75 0.1458628 0.04994568 2-Feb-98 56.56 2-Feb-98 1049.34 0.1090196 0.070449259 2-Jan-98 51 2-Jan-98 980.28 0.0502471 0.01015014 1-Dec-97 48.56 1-Dec-97 970.43 0.1293023 0.015731631 3-Nov-97 43 3-Nov-97 955.4 -0.0157931 0.044586823 1-Oct-97 43.69 1-Oct-97 914.62 -0.0319078 -0.034477662 2-Sep-97 45.13 2-Sep-97 947.28 0.0495349 0.053153524 1-Aug-97 43 1-Aug-97 899.47 0.0518591 -0.05744585 1-Jul-97 40.88 1-Jul-97 954.29 0.0757895 0.078123235 2-Jun-97 38 2-Jun-97 885.14 0.0133333 0.043452634 1-May-97 37.5 1-May-97 848.28 0.0791367 0.058576884 1-Apr-97 34.75 1-Apr-97 801.34 0.1077463 0.058405537 3-Mar-97 31.37 3-Mar-97 757.12 3-Feb-97 32.88 3-Feb-97 790.82 3-Jan-97 32.13 3-Jan-97 786.16 <!-- chart1.finance.dcn.yahoo.co m uncompressed Thu Apr 8 13:27:14 PDT 2004 --> <!-- chart2.finance.dcn.yahoo.com uncompressed Thu Apr 8 13:29:15 PDT 2004 --> 25

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