Ford value enhacement plan Essay

2102 Words Nov 6th, 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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What are the alternatives for distributing cash?
Cash Dividends Share Repurchase
Paying Dividends attracts a certain clientele of investors.
Some investors prefer the certainty dividend payments to the possibility of substantially higher future capital gains.
The dividend of the new Ford shares will be adjusted so that shareholders using their cash bonus to purchase new shares will receive the same total dividend as before the transaction occurred.
Dividend payments provide important signals regarding the strength or quality of the firm’s present and future cash flows.
Dividends from stocks are taxable, as are any capital gains they generate.
Ford Family prefers Dividends.
Ford shares are now priced at about $41 and pay an annual dividend of $2 per share, for a yield of about 4.9%. After a cash payout of $20 a share, the new Ford shares will be worth about $21 each.
To make the transaction revenue-neutral, the $20 cash distribution per share can buy about 0.95 (20/21) new shares of Ford for each of the old shares owned.
Share Repurchases mean a company buys its shares back from the market or from the shareholders who are willing to tender such shares.
Repurchases have also been found to signal favourable information.
Shares repurchase reduces the number of shares outstanding (i.e. supply), it increases earnings per share and tends to elevate

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