Usually it is wished that directors who also serve as CEOs or in similar positions should not serve on more than two boards of public companies in addition to the Ford board and other directors should not serve on more than four other boards of public companies in addition to the Ford board.
With the By-Laws of the Company, a director will not be nominated for election to the Board after his or her 72nd birthday, although a waiver of this limitation may be granted by the full Board.
1.8.3 Independence of Directors
A majority of the directors must be independent directors under the New York Stock Exchange (NYSE). According to the Board of Directors the directors who do not meet the NYSE's independence standards have historically made, and can be expected to continue to make, valuable contributions to the Board and to the Company by reason of their experience, judgment, intelligence and wisdom. Independent means that under the NYSE rules, the Board must determine that a director does not have any direct or indirect material relationship with Ford. The following guidelines have been made by the Board to assist it in determining director independence with the guideline of the NYSE rules:
- No director who is an employee/former employee of the company can be independent until 3 years after termination of employment
- No director who is, or in the past 3 years has been, related with or employed by the
company's present or former independent auditor can be independent until 3 years after the end of the affiliation, employment or auditing relationship
- A director can´t be independent if he or she is or in the past 3 years has been a part of an interlocking directorship in which an executive officer of the company serves on the compensation committee of another company that employs the director.
- No director can be independent if he or she is receives or in the last 3 years received more than $100,000 during any 12-month period in direct compensation from the company other than director and committee fees and pension or other deferred compensation for prior service
- Directors with family members in the above mentioned categories have the same 3-year restriction
The next mentioned commercial, charitable and educational relationships are not considered to be material relationships that would weaken a director's independence:
- If within the previous three years a Ford director was an executive officer or employee of another company that did business with Ford and either: the annual sales to Ford were less than the greater of $1 million or two percent of the total annual revenues of such company, or then that the annual purchases from Ford were less than the greater of $1 million or two percent of the total annual revenues of Ford, in both cases for any of the three most recently completed fiscal years
- If within the last three years a Ford director was an executive officer of another
company which was indebted to Ford or to which Ford was indebted, and either: the total amount of such other company's indebtedness to Ford was less than two percent of the total consolidated assets of Ford or the total amount of Ford's indebtedness to a nother company was less than two percent of the total consolidated assets of such other company, in both cases for any of the three most recently completed fiscal years
- If within the previous three years a Ford director served as an executive officer, director or trustee of a charitable or educational organization, and Ford's discretionary contributions to the organization were less than the greater of $1 million or two percent of that organization's total annual discretionary receipts for any of the three most recently completed fiscal years.
The Board will check annually all commercial, charitable, and educational relationships between the company and its directors. The Board's decision of every director's independence will be decided annually in the company's proxy statement.
For relationships that are not qualified within guidelines and above mentioned factors, the decision of whether the relationship is material, and therefore whether the director is independent, should be made by the directors who satisfy the above independence guidelines. The Company will explain in the next proxy statement the basis for any Board determination that a relationship was immaterial despite the fact that it did not meet the categorical standards of immateriality set forth in the above guidelines.
1.8.4 Board Committees
The Board has made the following Committees to help the Board in discharging its
responsibilities:
- Audit
- Compensation
- Sustainability
- Finance
- Nominating
- Governance
The current charters of these Committees are published on the Ford public website and can also be mailed to shareholders on a request that should be written. The Committee chairs report at each of their meetings on the matters that are considered to the full Board of Directors following each Committee meeting. In addition to the requirement that a majority of the Board satisfy the independence standards discusses above, members of the Audit Committee should as well satisfy additional independence requirements. Specifically, Audit Committee members should not directly or indirectly receive any compensation from the company other than their directors' compensation.
1.8.5 Compensation of Board
The Nominating and Governance Committee have the responsibility for recommend to the Board compensation for non-employee directors. In discharging this duty the Nominating and Governance Committee should be guided by: compensation should be competitive and fairly compensate directors for the time they have given and their effort required of Board and Committee members. Compensation should be simple, transparent and easy for shareholders to understand. Each year, the Nominating and Governance Committee review non-employee director compensations.
1.8.6 Director Orientation and Continuing Education
The Company provides an orientation for new directors, and periodically provides materials or briefing sessions for all directors on matters that would assist them in discharging their duties. Each new director should spend a day at corporate headquarters for personal briefings by senior management on the company's strategic plans, its financial statements, and its key policies and practices. All directors have the opportunity to participate in educational programs. Non-employee directors have full and complete access to the senior managers of the company.
1.8.7 Meetings
The Board of Directors have usually 7 meetings a year. Directors ordinarily are expected to attend all the meetings and to review the materials given to them in advance of each meeting. The Board is responsible for its agenda. Every year the Chairman will propose for the Board's approval main points of strategy, risk and corporate reputation to be scheduled and discussed during the the year. The Board can give suggestions. As a result of this process, a schedule of main discussions for the each year will be made. The non-employee directors will meet for a period of time at each scheduled Board meeting without management present. A presiding director will preside at these meetings and also serve as the presiding director in performing such other functions as the Board may direct, including advising on committee selection and advising the Chairman on the agenda for Board
meetings. The non-employee directors can meet without management present at such other times as determined by the presiding director or at the request of any non-employee director.
1.8.8 Responsibilities and Duties
CEO/Management Oversight and Compensation
The Board is also responsible for:
- selecting, evaluating and providing a compensation of the CEO and overseeing CEO succession planning
- providing counsel and oversight on the selection, evaluation, development and compensation of the officers of the Company
- maintaining a succession plan for the CEO and other main senior executives and also a emergency succession plan for the CEO
Business, Product and Strategic Matters/Compliance with Law and Company Policy
The Board should also:
- review, approve and monitor basic financial and business strategies and significant company procedures
- review and discuss reports by management on the performance of the company
- assess major risks facing the company and review and approve strategies for handling such risks
- secure procedures are in place to maintain a integrity and reputation of the company
1.8.9 Conflicts of Interest and Concern Reporting
The Board wants Ford directors, officers and employees to act ethically at all times and in accordance with company codes of ethics. If a conflict of interest arises for a director the director should immediately inform the Chairman and the presiding director. If the conflict is significant and could not be solved the director should resign
Any person who would want to send a written communication to the Board, including any person who has a concern about Ford's conduct or about the company's accounting, internal accounting controls or auditing matters, can do so by sending a communication to the Board, any non-employee director or to the Audit Committee. These communications are of course confidential or anonymous. They will be reviewed and addressed by Ford's Compliance Office with the help of Human Resources, the General Auditor's Office and Executive Operations.
The status of all the outstanding communications addressed will on a quarterly basis be reported to the directors, the Audit Committee or the Nominating and Governance Committee, as appropriate. The Board, the Audit Committee or the Nominating and Governance Committee can decide to address these communications outside a normal company practice and procedure.
1.9 Annual Performance Evaluation
The Board and each of the Committees perform always a annual self-evaluation. Every director should provide his or her assessment of the effectiveness of the Board and the Committees on which he or she serves.
Audit Committee - Ford Motor Co (F)
Compensation Committee - Ford Motor Co (F)
Key Executives - Ford Motor Co (F)
Insiders At Ford Motor Co (F)
Other Board Members On Board
1.9.1 CEO Alan Roger Mulally
Allan Roger Mulally is the President and Chief Executive Officer of Ford Motor Company. Mulally was elected President and Chief Executive Officer of Ford, September 1, 2006. Since March 2001, Mulally had been Executive Vice President of the Boeing Company and President and Chief Executive Officer of Boeing Commercial Airplanes. He was also a member of the Boeing Executive Council and served also as President of Boeing's space and defense business. He has served as co-chair of the Washington Competitiveness Council, and has sat on the advisory boards of NASA, the University of Washington, the University of Kansas, the Massachusetts Institute of Technology, and the U.S. Air Force Scientific Advisory Board. He is a member of the U.S. National Academy of Engineering and a fellow of England's Royal Academy of Engineering.
Ford Motor Co
Compensation for 2011
Salary $2,000,000
Bonus $1,820,000
Restricted stock awards $13,924,993
All other compensation $612,587
Option awards $7,499,992
Non-equity incentive plan compensation $3,640,000
Total Compensation $29,497,572
Options Exercised for 2011
Number of securities underlying options unexercisable 884,433
Shares acquired on exercise 250,000
Stock Ownership for 2012
Number of shares owned 5,676,023
Boeing Co
Stock Ownership for 2006
Number of shares owned 79,741
2.Financial statement and ratio analysis
cash amounts in 000
3.Estimation of the cost of equity, debt and the cost of total capital
Overall risk profile
- An increase in fuel prices, continued volatility of fuel prices, or reduced availability of fuel
- Continued or increased price competition resulting from industry excess capacity, currency fluctuations, or other factors
- Fluctuations in foreign currency exchange rates, commodity prices, and interest rates
- Adverse effects on operations resulting from economic, geopolitical, or other events
- Economic distress of suppliers that may require to provide substantial financial support or take other measures to ensure supplies of components or materials and could increase our costs, affect our liquidity, or cause production constraints or disruptions
- Work stoppages at Ford or supplier facilities or other limitations on production
- Single-source supply of components or materials
- Labor or other constraints on ability to maintain competitive cost structure;
- Substantial pension and postretirement health care and life insurance liabilities impairing liquidity or financial condition
- Worse-than-assumed economic and demographic experience for postretirement benefit plans
- Restriction on use of tax attributes from tax law "ownership change
- The discovery of defects in vehicles resulting in delays in new model launches, recall campaigns, reputational damage, or increased warranty costs
- Increased safety, emissions, fuel economy, or other regulations resulting in higher costs, cash expenditures, and/or sales restrictions;
- Unusual or significant litigation, governmental investigations or adverse publicity arising out of alleged defects in products, perceived environmental impacts
- A change in requirements where we have long-term supply arrangements committing us to purchase minimum or fixed quantities of certain parts, or to pay a minimum amount to the seller
- Adverse effects on results from a decrease in or cessation or clawback of government incentives related to investments
- Inherent limitations of internal controls impacting financial statements and safeguarding of assets
- Cyber security risks to operational systems, security systems, or infrastructure owned by us or a third-party vendor, or at a supplier facility
- Failure of financial institutions to fulfill commitments under committed credit facilities
- Inability of Ford Credit to access debt, securitization, or derivative markets around the world at competitive rates or in sufficient amounts, due to credit rating downgrades, market volatility, market disruption, regulatory requirements, or other factors
- Higher-than-expected credit losses, lower-than-anticipated residual values or higher-than-expected return volumes for leased vehicles
- Increased competition from banks or other financial institutions seeking to increase their share of financing Ford vehicles
-
New or increased credit, consumer, or data protection or other regulations resulting in higher costs and/or additional financing restrictions
Ford is exposed to a different market and other risks. These risks affect the Automotive and Financial Services sectors differently. It monitors and manages these exposures as an integral part of its overall risk management program that include reports to a central management committee, the Global Risk Management Committee.
Ford’s Automotive and Financial Services sectors are exposed to liquidity risk, or the risk of having to curtail the business, being unable to meet present and future financial obligations because funding sources are reduced or unavailable.
Ford is exposed to a variety of insurable risks, such as loss or damage to property, liability claims, and employee injury. It protects against these issues by a combination of self-insurance and the purchase of commercial insurance designed to protect towards events that could issue in significant losses. Direct responsibility for the execution of market risk management strategies is at the Treasurer's Office and is governed by written policies and procedures. Separation of duties is maintained between the development and
authorization of derivative trades, the transaction of derivatives, and the settlement of cash flows. Regular audits are to ensure that controls are in place and that they remain effective.
In addition with corporate risk management policies, Ford uses derivative instruments,for example forward contracts, swaps and options that economically hedge certain exposures.
Realized annual return in 2011:
Average returns for 2008, 2009, 2010 and 2011:
We computed monthly returns (2007-2010) using historical stock prices at interactive chart on Yahoo Finance website.
Dividends were 0
R = Pt+1-Pt/Pt
R2008 = -0.59
R2009 = 2.06
R2010 = 2.34
R2011= -0.249
Average return 2008-2012:
= (R1+ R2+ R3 + R4)/4
= 0.89
Variance and standard deviation of return 2011:
Var(R)= 1/(t-1) (R2008 - )2 + (R2009 - )2 + (R2010 - )2 + (R2011 - )2
Var(R)= 2.319
SD(R)== 152.3%
Standard error and 95% confidence interval:
Standard error= SD(R)/4
Standard error= 76.15%
95% confidence interval= Historical average return ± (2x standard error)
95% confidence interval= 0.89 ± 2 x 0.7615
95% confidence interval is from -0.63 to 2.413 (-63% to +241.3%)
The marginal investor of the company :
It is listed on the New York Stock Exchange and is controlled by the Ford family, although they have minority ownership. The relative size of the founding family’s stake has shrunk, particularly during the past few years, as Ford has issued new common shares to raise capital and preserve its liquidity through the worst industry crisis in decades.
Estimation of default risk and cost of debt of Ford
YTM of a long term bond (rd) = 5.29%
Bond rating = BB+
Default spread = 3.75%
Treasury bond rate = 1.62%
Market cost of debt (rd) = 5.37%
Average default rate for BB = 2.1% (in recession 8%)
Average βd by rating = 0.17
Weights of debt and equity:
Debt:
Long term debt + Short term debt = 99.488bn = $99,488,000,000
Equity:
3.81bn of shares x 11.45$ = 43.62bn = $43,620,000,000
Value:
143.108bn = $143,108,000,000
Regression results when comparing Fords monthly 5-year returns to market indexes next:
Which tells us next:
It is now easy to bring some conclusion on Fords returns. Jensen’s alpha asses performance of Ford Motor Company which is 2,8% better than firm NASDAQ listed firms performance. Also annual excess return on Ford is 37% which is high.
Relating to risk we investigated R-Squared which is 0,8 % which tells that this amount comes for market risk which may be truth because we compared it with all NASDAQ listed firms and only 12 of those are from automotive industry. More objective and relevant for Ford would be R-Squared of industry which is 35% - telling 35% of risk comes from market sources and 65% from firm specific risk. According to regression 1% change in market will influence Ford only 0, 31%.
Estimate the WACC for the firm.
WACC = (E/E+D)rford+(D/E+D)rd(1-T)
T= 36%
Equity cost of capital:
E[Rmkt] = 12%
Rf = 1.62%
Market risk premium = 12% - 1.62%
rford = Rf + βford x market risk premium
rford = 1.62% + 1.53% x 10.38%
rford = 17.5%
T = 36%
WACC = (99.48bn/143.1bn)17.5% + (43.62bn/143.1bn)5.37% * (1-36%)
WACC = 0.175*0.6951+0.0537*0.3048*0.64
WACC = 0.1216+0.0104
WACC = 13.2%
4.Evaluating the firm’s current investments
ROE > Re = good current investments
ROE = Net income/book value on Equity = 43.33% Re= 17.5%
ROC = Net Income in 2011/Long term debt in 2010 + Shareholders equity in 2010
ROC = 19.5% WACC=13.2%
ROC>WACC = company is creating value
5.Where and how firm get its current financing?
Part I
Where and how does the firm get its current financing?
Short-term debt = 0
Long-term debt = $99,488,000,000
Firm is financed with a large percentage of debt and that can increase the risk of default, but that can add discipline to managers and company can use interest tax shield (tax savings from debt).
Part II
- Based on the cost of capital approach, what is the optimal debt ratio for your firm?
As it can be seen from section 6. optimal D/D+E ratio for company is 90% (cost of capital is minimised)
- Does your firm have too much/ too little debt relative to the industry/ to the market?
BV Debt Ratio (Ford) = Total Liabilities/Total Asset = 91% - high debt ratio comparing to industry
Car industry BV Debt Ratio = 80%
Part III
- Determine whether your firm should move to the optimal and if so, how.
Ford company can move to optimal debt ratio slowly, as there is not a chance for take –over and other risks related to how quickly to move. Company should also finance new investments with equity. Investments quality is good and there is not a need for a quick move.
- Analyse the right type of debt for your firm (intuitive approach).
Ford sells cars and trucks. Project cash flows are long-term, in various currencies and industry is high competitive.
Debt should be in long-term, in mixed currency and fixed.
6. Estimation of the optimal financing mix with an indication of whether and how the company should move to the optimal capital structure
βu= β/( 1+ (1-T) x (D/E))
β = 1.53
βu= 1.53/(1-0.36)x 2.28 = 1.53/1.4592
βu = 1.048
βL= βu (1+((1-T)(D/E))
Estimating the cost of equity at different levels:
Interest Coverage ratio
EBIT = 13,112,000
Interest expenses = 4,431,000
ICR = 2.95
This is BBB rating based on coverage ratio cost of debt is 4.12%
Bond Ratings, Cost of Debt and Debt ratios
Cost of capital at different levels of debt
FCFF = (1-T)EBIT + Depreciation – CAPEX – Change in working capital
FCFF= 8522.8 + 4256 – 4300 – 2523 = 5955.8
FCFF = 5,955,800,000 $
Market value of Ford = $ 143.108 milion
WACC=13.2%
FCFF= $ 5955.8 million
Firm value = FCFF (1+g)/WACC-g
143.108=5955.8(1+g)/WACC-g
5955.8+5955.8g+143.108g=188.90256
5955.8+6098.908g=188.90256
6098.908g=-5766.89744
g=-0.945562
g=-94.55%
New firm value:
Best WACC = 9.53% = 0.0953
FCFF = 5955.8 million
g=-94.55%
New firm value = 5955.8*(-8.455)/(-9.3597)
New firm value = 5380.117 million
Change in firm price = 5380.117 million - 143.108 million = 5237.009 million
Effect on share price: Increase in firm value/number of shares outstanding =
5237.009 million/ 3819 million = $ 1.37 per share
7. Evaluation of Cash Redistributions to Shareholders
Ford Motor Company Returns 2007-2011: “Period of canceled dividend payout and no buybacks”
Ford Motor Company has an interesting dividend policy. We have done an analysis for several years. Their Policy was not to pay any dividend starting from September 2006. In second quarter of 2006 they have cut dividend for 50% (form 10c per share to 5c), and quarter after canceled dividend payout. (T. Bernard and J. Mincer, 2009). The Automotive giant did dramatic change as a part of a huge restructuring plan and layoffs in the company that didn’t show the best results in preceding years. At that specific moment, the forecast was bad. Many analysts thought that the older Ford clientele is going to release the stocks in this period and many believed that this is not the best dividend policy. Generally it´s not a popular decision, and almost always a bad signal for the financial market, but this was the reality that Ford was facing. The big effect did not happen immediately but with time it was obvious that Ford’s decisions was perhaps right, as the big crisis followed and the automotive industry was one of the biggest victims of this time.
This table shows important dates and movement of stock prices in no-dividend periods
From this table we can see that Ford has brought the right decision in very important moment for the entity. They have survived the crisis and the value of the stock has been re-established.
Employment of CEO Alan Mulally has brought good signs for investors. The Ford Motor Company has announced dividends first time in more than 5 years. Restored Dividend payout has been also evident in Ford’s annual report where they declared payment of 5c per share in first quarter of 2012. (M.Ramsey, 12.2011)
As we are now in the end of 2012, we can check whether the expectations were true. Ford has paid out dividend 4 times per 5c per stock as given.
This dividend policy showed to be good, especially because (on purpose or not) it lowered the effect of the economic depression in 2008 and the following years. As we can examine the dividend payout rate, at least we can analyze FCFE- free cash flow for equity.
From table we have constructed and calculated FCFE we can conclude that Ford reasonably haven’t paid out dividends in previous years, and also we find very positive signal for investors that after marking positive FCFE in 2011 they have declared and paid dividends in 2012.
6.1 Main Competition Analysis
The Ford’s biggest competitors are General Motors and Toyota Motors.
As it can be seen from the tables GM and Toyota have paid their dividends regularly and didn’t change their policies. Nevertheless they did so from different reasons. Toyota from success in US market in years prior and during the crisis. Toyota has with years become world’s largest car manufacturer, so it has been reasonable for them to maintain their dividend policy.
GM on the other hand went thru the hardest part of their history. Besides government back-ups they had to sell their brands Saab and Hummer and go through a restructuring period. Selling the assets made it mandatory for them to return some investments to the investors.
References
-
Bernard T. and Mincer T. (2009, September 19), “With Ford's Dividend Out of Gas, Investors May Seek Other Models”, Wall Street Journal, Retrived December 10 2012 from:
-
Ramsey M. (2011, December 9) “Ford to Restart Dividend, Ending Five-Year Drought”, Wall Street Journal, Retrieved December 10, 2012 from:
- finance.yahoo.com
- www.morningstar.com
- www.google.com/finance
- Ford Motor company, financial statements 2011
- ford.com
by
sxomi (student)
