Ford Case

4790 Words20 Pages
Shanghai Jiao Tong University
Antai College of Economics and Management

Corporate Finance Homework

Whoever Pocketed Value From VEP?

Team: Dong Nan 1081209045
Gu Chengzong 1081209020
Li Hongke 1081209050
Lu Linlin 1081209031
Lu Yao 1081209043

March 2009
Excessive cash and undervalued stock price forced Ford to conceive an unprecedented cash payout system - Value Enhancement Plan in 2000. For a dual-stock-structure company, this recapitalization did favor much Ford family which held the dominant voting power by giving it larger flexibility, enhanced control with less capital as well as tax benefit and confidence improvement. While the common shareholders may benefit less
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2. Value Enhancement Plan
To solve or at least alleviate the two problems, Ford came up with a brilliant plan to enhance value for its shareholders. The so-called Value Enhancement Plan (VEP) was just designed for this purpose. This section first lays out basic material of VEP, and compares several alternatives in cash distribution to justify feasibility of VEP in perspective of common shareholders. Then, we evaluate three options form the common shareholders’ perspective. Sensitivity analysis is conducted to give a broader picture of VEP under slightly different assumptions. Spin off related issues are discussed at last.
2.1 Overview Before we dig into the details of this plan, let’s have an overview of relevant data in the case (Figure 5). Further elaboration on these figures is largely skipped. However, there are three points worth noting: * Stock price would drop by $20 immediately upon announcement of VEP, without consideration of market reaction. * Dividend yield remains unchanged, thus is subjected to adjustment in dollar terms. * Stock option should be adjusted to reflect VEP effect. Employees are entitled to purchase 131.64mn common shares at an average price of $18.68.

The way VEP works is quite straightforward (Figure 6). Shareholders would exchange their old common

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