Corporate Finance Individual
Corporate Finance Individual
Corporate Finance Individual
Case study title: Ford Motor Company’s Value Enhancement Plan (VEP)
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Ford’s Value Enhancement Plan (VEP) takes into consideration the interests of
various shareholders by providing them different options- $20 in cash, additional new
common shares or a combination of cash and additional shares
ADVANTAGES OF VEP
While talking about cash option, since the company is not doing anything with the
major cash reserve, the shareholders can invest profitably with these excessively
returned cash reserves. Since the returned cash is taxed as capital gain, unlike cash
dividend, it results in generating tax efficiency for the shareholders. This will still not
cause a loss to the shareholders, as even though the new shares price will decrease,
the additional cash that the shareholders receive will offset this. But there is a
different scenario for the companies, who wish to keep their dividend payout ratio
constant. This will result in reduced dividend payment as decrease in share price will
result in reduced dividend per share. Thus, shareholders keep the same amount of
shares before the introduction of VEP, resulting in reduction in total dividend
payment.
Hence, the number of new shares will reduce, thereby increasing the earnings per
share and the overall demand for Ford’s share, which benefits the share price in long
run. Thus, the effect of cash option is similar to share buyback.
If shareholders choose stock option, they can have more control over the company by
increasing the voting power. Also, since with the cash option, share price will
increase, shareholders will be at a major advantage if they hold more new Ford
shares.
This combination is profitable to the shareholders, as they can take some money out
and invest it elsewhere and reap profits while maintaining their interest in the
company. Thus on one hand, they can enjoy tax efficiency, while on the other hand,
when share price increases, they can have major profits and also a say in the firm.
Therefore, VEP is better than cash dividend as it is more tax efficient, and compared
with share repurchase, it helps the shareholders to remain or increase their control in
the company, thus fulfilling their needs. Therefore, based on this analysis, Ford
should go ahead with VEP.
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2. POSSIBLE CHOICES BY DIFFERENT SHAREHOLDERS
Ford family members will definitely want to expand their control in the firm and
hence they would choose the stock option. With the support of VEP, their equity
share in the firm decreases from 5% to 3.6%, while their 40% voting power will
remain unchanged. Hence, if they go for the stock option, their voting power remains
beyond 40%, while they hold more common shares in their hand.
A regular outsider shareholder’s purpose is to make more and more profits and he
wouldn’t be affected by the voting power. So, this person would choose the cash
option, because according to him/her, Ford has very few growth opportunities to
expand and it can’t find projects that are successful and profitable. Hence, by getting
his/her money back, one can use it more efficiently according to one’s own needs.