Ford Valuation, i Ford Motor Company Valuation FISV 5526: Financial Reporting and Control Professor David Cartwright May 2016 Ford Valuation, ii Table of Contents General Information XXXXXXXXXX Short...

Only need the last part of the project--the equity valuation and the memo done please. Attached is the exemplar and the assignment


Ford Valuation, i Ford Motor Company Valuation FISV 5526: Financial Reporting and Control Professor David Cartwright May 2016 Ford Valuation, ii Table of Contents General Information 1 Short Term Liquidity 1 Capital Structure and Solvency 2 Asset Utilization 3 Profitability 4 Equity Valuation 4 Memorandum 7 References 8 Appendices 1.1 Current Ratio 9 3.1 Net Operating Asset Turnover 10 4.1 Profit Margin and Return on Net Operating Assets 13 5.1 Ford Motor Company Historic Sales and ∆Sales 14 Ford Valuation, 1 General Information For the entirety of the following analysis of Ford Motor Company versus General Motors, individual company data was extracted from the most recent and respective 10-K documents filed with the United States Securities and Exchange Commission (SEC). Industry ratios and data were extracted from ‘Stock Analysis on Net’ via the url: www.stock-analysis-on-net.net/ Short Term Liquidity A current ratio is designed to measure short term liquidity by dividing Current Assets by Current Liabilities. At a glance, the ratio can indicate whether or not a company will be able to “service its debt in the short run” (Easton et al., 3-20). A company with a ratio of 1.0 is said to have enough current assets to pay short term debt. A ratio lower than one indicates a company may have trouble paying short term debt, and a ratio higher than 1.0 may indicate a company is being too frugal with its assets and could take more risks or make more investments in the future. As of the end of Fiscal Year 2015, Ford Motor Company’s current ratio is 0.9 and General Motors’ current ratio is 1.09; industry average is 1.09. These numbers indicate both companies have good liquidity though General Motors may be a little better off than Ford. Ford having a ratio slightly less than 1.0 indicates that differences in inventory levels might explain ratio difference (Easton et al., 4-15). Table 1.1: Current Ratio Current Assets Current Liabilities Current Ratio *Ford $73,754 $81,764 0.90 GM $78,007 $71,466 1.09 Industry 1.09 *See Appendix 1.1: Current Ratio A quick ratio measures cash plus marketable securities plus accounts receivable, all over current liabilities. This ratio gives readers another way to view liquidity by excluding inventories and prepaid assets (Easton et al., 4-16). As of the end of Fiscal Year 2015, Ford Motor Company’s quick ratio is 1.68 and General Motors’ ratio is 0.44; industry average is 0.72. In contrast with results from the current ratio, the quick ratio indicates Ford is actually more liquid than General Motors. As mentioned above, a possible explanation for the drastic difference in the results from these two ratios is the differing inventory levels between the two companies. http://www.stock-analysis-on-net.net/ http://www.stock-analysis-on-net.net/ Ford Valuation, 2 Table 1.2: Quick Ratio Cash Marketable Securities Accounts Receivable Quick Ratio Ford $14,272 $20,904 $101,975 1.68 GM $15,238 $8,163 $8,337 0.44 Industry 0.72 Between the two different measures of liquidity for both Ford Motor Company and General Motors, both companies seem to be safe short term investments with key differences lying in inventory values and prepaid assets, with no clear distinction as to which company would make for a better investment. Capital Structure and Solvency The total debt to equity ratio equals all long term debt plus all short term debt, divided by stockholders’ equity. This ratio is a measure of solvency, indicating whether or not a company can generate sufficient cash to repay long term obligations (Easton et al., 3-20). The higher a company’s total debt to equity ratio, the riskier investment a stockholder is making. These ratios should be considered in context of industry, however, and therefore can differ dramatically from one industry to the next. Ford Motor Company and General Motors both hold more debt than equity. Table 2.1: Total Debt to Equity Ratio Long term Debt Short Term Debt Stockholders’ Equity Total Debt to Equity Ratio Ford $120,731 $13,902 $28,657 4.70 GM $43,549 $19,562 $39,871 1.58 Industry 2.86 Ford’s debt to equity ratio is three times General Motors’ ratio, and roughly 1.5 times that of the industry indicating the company relies more heavily on debt financing than most competitors. Table 2.2: Operating vs Non-Operating Return ROE RNOA Non-Operating Return Ford 27.8% 7.9% 19.8% GM 25.2% 16.2% 9.0% Industry 24.9% Ford Valuation, 3 Table 2.3: Debt to Assets Ratio Total Assets Debt to Assets EBIT Interest Expense Ford $224,925 0.60 $11,025 $773 GM $194,520 0.32 $8,161 $443 Industry 0.74 Table 2.4: EBITDA Coverage Ratio Depreciation + Amortization EBIT Interest Expense EBITDA Coverage Ratio Ford $7,993 $11,025 $773 25.60 GM $8,017 $8,161 $443 37.52 Industry Table 2.5: Liabilities to Equity Ratio Total Liabilities Stockholder's Equity Liabilities to Equity Ratio Ford $196,174 $28,657 6.85 GM $154,197 $39,871 3.87 Industry Asset Utilization Asset utilization examines the company’s revenues in relation to their dollar assets. We calculate Net Operating Asset Turnover (NOAT) by dividing the company’s sales with their average Net Operating Assets. Asset utilization builds into the Parsimonious method of multiyear forecasting for a company by using both net operating profit margins (in the next section) and NOAT. Asset utilization represents how optimized a company’s assets are toward producing sales. If a company has a NOAT of 1.0, then every dollar earned is a result of a single dollar of an asset. This is not the ideal for a company as producing more in sales per dollar would show a better use of assets. Therefore, a higher NOAT is desirable. Ford has a 1.25 NOAT, while GM has a much higher 2.50. This predicts that Ford will not see as high a return on their assets as GM. Table 3.1: Net Operating Asset Turnover Sales *Average NOA Net Operating Asset Turnover Ford $149,558 $119,629 1.25 GM $152,356 $60,882 2.50 Industry *See Appendix 3.1 Ford Valuation, 4 Profitability Profitability may be determined through an examination of profit margin, return on net operating assets, and return on equity. Profit margin is calculated by dividing Net Operating Profit after Taxes (NOPAT) by Sales. Return on Net Operating Assets (RNOA) is calculated by dividing NOPAT by the Average Net Operating Assets. As predicted with the NOAT ratio, Ford has a smaller RNOA than GM, indicating that they are not as efficient in their asset utilization. Table 4.1: Profit Margin and Return on Net Operating Assets NOPAT Profit Margin RNOA Ford $9,469 6.3% 7.9% GM $9,835 6.5% 16.2% Industry 6.0% *See Appendix 4.1 Return on Equity is calculated by dividing net income by average equity and is a combination of the return on both operating and non-operating activities. A higher ROE is an indicator of high growth within a company. Ford shows a 2.9% higher ROE than the industry and 2.6% higher than GM, indicating that Ford is using its shareholder’s money to generate more profit. Table 4.2: Return on Equity Net Income Average Equity ROE Ford $7,371 $26,561 27.8% GM $9,615 $38,174 25.2% Industry 24.9% Equity Valuation Equity valuation is used to determine the value of the company along with their assets. It helps decide their stock margins as well as their assets. There are numerous ways to calculate the equity valuation as there are different categories in which one can form a determination. Once internal equity valuation is determined it can be compared with competition as well as prior company history. Equity valuation upon growth: Growth = Return on Equity x amount of earnings / dividends Growth = ROE x Plowback Growth Ford = 2.2 x (1.84/0.15) Growth Ford = 2.2 x 12.27 Growth Ford = 26.99 Growth GM = 1 x (5.91/2.2) Growth GM = 1 x 2.69 Growth GM = 2.69 Ford Valuation, 5 Industry's current growth has been decreased from the average 3.1 to 1. The numbers provided from the 10K report show a surprising spike for Ford versus GM. Although they are both American companies, Ford may have new innovations along with additional supplies that are non-automotive items that