Research Project Part 2 - Ford Motor Co

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Apr 3, 2024

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Research Project Part 2: Ford Motor Company Your Name UMGC: Business Finance 330 Your Professor July 4, 2022 1
Ford Motor Company Ford Motor Company, commonly known simply as Ford, is an American automobile company headquartered in Dearborn, Michigan. The company was founded by Henry Ford in 1903. Henry Ford notably contributed to the automobile history and auto production methods by introducing the first moving assembly line in 1913. With this production method, Ford mass produced the Model T selling over a million units in its 20-year run (Ford, 2022). Ford Motor Company is publicly traded on the New York Stock Exchange as NYSE: F and their fiscal year runs from January 1 st to December 31 st of each year. The purpose of this report it to analyze the financial ratios of the company along with evaluation of Ford’s stocks and bonds performance over the last year. Financial Leverage Ratios *Ford Motor Co 2017 2018 2019 2020 2021 Debt to Asset Ratio 0.86 0.86 0.61 0.51 0.54 Debt to Equity Ratio 2.94 2.80 3.09 3.63 1.84 Interest Coverage Ratio 1.80 1.41 0.94 0.89 3.52 Financial leverage is an investment strategy of using borrowed money to increase potential returns and to expand the asset base (Hayes, 2022). Companies utilize this strategy to finance their assets and invest in business operations to increase shareholder value instead of issuing stock to raise capital (Hayes, 2022). Investors use financial leverage to multiply their buying power and increase the returns of their investment. *Morningstar (2022) Debt to Asset Ratio in the table above compare Ford’s obligations (debt) to their total assets. Ford’s debt to asset ratios over the last 5 years have slightly 2
decreased and remains under 1. This means Ford has more assets than debt giving them more financial flexibility to pay higher salaries or expand more aggressively (MasterClass, 2022). Debt to Equity Ratios demonstrates the proportions of equity and debt Ford is using to finance its assets and shareholder’s equity can fulfill obligations to their creditors (Bloomenthal, 2022). Ford’s debt to equity ratios over the past 5 years were slightly increasing but took sharp decline in 2021. This means Ford was slowly increasing debt to equity from 2017 to 2020 but managed to lower in 2021 from 3.63 to 1.84, a decrease of 1.79. A lower debt to equity ratio translates to Ford lowering its risk of bankruptcy. Interest Coverage Ratio is used to measure how many times a Ford can pay its interest payments using its earnings (Hayes, 2022). An interest coverage ratio of 1.5 or lower puts the ability of Ford to meet interest expenses questionable (Hayes, 2022). Ford had a 1.84 interest coverage ratio in 2017 but fell below the 1.5 ratio in 2018 and below 1 ratio in 2019 and 2020. Fortunately, Ford was able to bring the interest coverage ratio up to 3.52 in 2021 giving them a better position. Based on the ratios above, Ford’s was financing their assets with debt, raising equity from debt, and not being able to pay off interest on their debts until 2021. During the period of 2017-2020, the financial structure of Ford was very risky and potentially placing investors’ money at risk of loss. However, in 2021, Ford improved their performance by limiting debt financing and increasing equity on their assets. Bond Performance Evaluation A bond is a debt obligation by Ford in which an investor lends money to Ford. In return, Ford commits to paying interest on the principle and return the principle 3
when the bond matures. On Market Insider, there are currently 8 active bonds for Ford Motor Company. Bond #1 is ISIN US345370BH27 is a 40-year bond issued by Ford Motor Company in 1992. Bond #2 is ISIN US435370BS81 is a 100-year bond issued by Ford Motor Company in 1997. Par Value Bond #1’s assumed par value is $1,000, last sale price was $109.77, coupon rate is 9.95% paid semiannually, and the maturity date is 8/15/2032, the investor will pay $1,064.13 to purchase the bond. (PV = 9.95%/2, 10*2, 109.77/2, 1000, 0) Bond #2’s assumed par value off $1,000, last sale price of $98.59, coupon rate of 7.70% paid semiannually, and a maturity date of 5/15/2097, the investor will pay $ 1,279.42 to purchase the bond. (PV = 7.70%/2, 75*2, 98.59/2, 1000, 0) Coupon Interest Payments Bond #1’s coupon interest payment is calculated by taking the par value of $1,000 and multiplying by coupon rate of 9.95%. This equals to a coupon payment of $99.50 . (1000 * 9.95% = $99.50) Bond #2’s coupon interest payment is calculated by taking the par value of $1,000 and multiplying by coupon rate of 7.70%. This equals to a coupon payment of $77.00 . (1000 * 7.70% = $77.00) Yield to Maturity (YTM) Bond #1 YTM is calculated by taking the face value, annual coupon rate, years to maturity, coupon payments per year and current price. After entering the $1,000 face value, 9.95% coupon rate, 10 years to maturity, coupon payments per year of 2 and current price of $1,064.13 on the YTM calculator on investinganwers.com, the YTM for Bond #1 is 8.97%. 4
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