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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 in number of shares. This would result in the dividend amount per share to most likely decrease and the total amount allocated to a dividend payment to stay constant. This will make dividends for the new Ford shares to go down because share price falls. Those who elect the $20 cash payout will maintain ownership of the same amount of shares they previously owned, therefore, the total dividend payment then becomes reduced. As a result of the cash payout, the number of new shares outstanding will reduce, this increases the earnings per share and, because of the increased rarity of shares, the overall demand for Ford's shares will increase. With higher demand in shares, comes a higher share price in the future. The stock option satisfies the shareholders need to remain or increase control of the company and will also benefit from holding new shares when the share price increases. Therefore, based on the analysis, the best option for Ford is to go with the VEP.

Issue a cash dividend

If Ford Motor Company was to issue a cash dividend it would not solve all of the company’s problems. It would only help get rid of the excess cash

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