Ford Company Analysis

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Case Study: Ford Motor Company’s VEP

Question 1
Go ahead with the Value Enhancement Plan

The feature of having both cash and new share options makes the VEP have its strengths and makes an excellence choice for Ford Motor Company. The cash option solves the problem of Ford having massive amounts of extra cash. Since Ford has no profitable activities for the extensive amounts of cash, returning the excess cash to shareholders allows them to make profitable investments. Different from a cash dividend, the returned cash will be taxed as capital gain and therefore achieves tax efficiency for the shareholders. When looking at the company’s point of view, they are able to lower the dividend payment because there will be an increase
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It would be inefficient for an institutional investor to elect to only the stock option. The reason for this is because the VEP favors the Ford family members and dilutes the value of an investors voting power. It would be hard to compete with the Ford family even if the investors were to put all of their $20 cash into buying new common shares. A combination of both cash and stock would be a good option for them as they would have an opportunity to get part of their investment out of Ford as well as invest in opportunities somewhere else. In a sense, they would not be putting all their eggs in one basket. They would have a good return on there initial investment if they take part of the $20 as cash.

Outside Shareholder

If I were a regular outside shareholder I would choose the cash option because their main concern is to make a profit while they care less about voting power. Going with the cash option is a good idea because if I were a shareholder, I would think that Ford has few growth opportunities and cannot find profitable plans for the future. This would give the shareholders the freedom to do as they desire with the cash and make their own independent investments. Although the new price of shares would decrease, the shareholders would not bear the loss because the cash they receive offsets the reduced price. Note that any final decision as an outside shareholder should calculate in the tax

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