Essay on Ford value enhacement plan

2099 Words Oct 18th, 2014 9 Pages
Ford Value Enhancement Plan (VEP)
In April 2000, Ford Motor Co. announced a shareholder Value Enhancement Plan (VEP) to significantly recapitalize the firm's ownership structure. Ford had accumulated $23 billion in cash reserves and under the VEP would return as much as $10 billion of this cash to shareholders. In exchange for each share currently held, the plan would give stockholders one new share plus the choice of receiving $20 in either cash or additional new Ford common shares. Shareholders electing to receive cash would be taxed on these distributions at capital gain rates. Among other things, the plan provided a means for the Ford family to obtain liquidity without having to dilute their 40% voting interest (even though they own
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Exchanging existing share for New Shares on a One for One basis. The VEP includes three options for different kinds of Shareholders:
Option 1: Shareholders who prefer Cash.
Option 2: Shareholders who prefer More Shares
Option 3: Passive Investors
Value Enhancement Plan has tax consequences. Those shareholders electing to receive the new shares of Ford instead of the 20-buck bonus will not be directly affected by the tax. The new shares are considered a tax-free exchange, with the holding period of the new shares considered the same as when the original Ford stock was purchased. Shareholders choosing to re-invest in stocks can be incentivized by having more voting power and control over the management.
Those shareholders choosing to collect the $20 cash per share will have to pay capital gains tax on the cash distribution just as though they have sold part of their shares. This can be either considered a short-term or long-term capital gain, depending on when your original Ford shares were purchased. Benefit out of opportunity Cost for the shareholders to invest the $20 in a different firm.
Ford family benefited by retaining their voting control since they did not have to surrender their Class B shares.
Since firms incur the re-purchase option by offering $20 cash for each stock bought back, the number of outstanding shares will be reduced. The Earnings per share will increase leading to an increased stock price.
Long-term gains (held more than a year) are taxed