Ford motor company aims to implement a new value enhancement plan due to the increase in liquidity. The aim of this strategy is to align the interests of the different shareholders in the company. Value enhancement plan under t6he Ford Company has given the different shareholders different options which include share splits and share repurchase. Ford is giving the shareholders an option of getting $20 in cash, additional new shares or a combination of both cash and shares (Michigan, 2003).

Value enhancement plan is characterized with share repurchase or stock split. According t ford, the shareholders have an option of exchanging existing shares for new shares on one for one basis. The shareholders are also accorded a chance to re invest the $20 earned in cash to receive additional new shares. In case of stock split, the cost of share is set to decrease significantly as the number of shares is set to register a substantial increase. From the case study, it is clear that, the shareholders choosing the share option will receive 0.748 new Ford common shares in lieu of $20 cash. This refers to stock split which is meaningless to the well being of the shareholder. On the other hand, the shareholder may opt to take the $20 in cash which is like selling part of their shares and represent the share repurchase characteristic of value enhancement plan.

In my own opinion, it is advantageous for the ford company to implement the value enhancement plan. With the combined features of stock split and the share repurchase, value enhancement plan is an advantageous practice which is highly recommended. In case of the cash option, the shareholders get an opportunity to invest the excessive funds in other profitable investments. This is an advantage to the shareholder since the massive cash would be of no good to the shareholder. The shareholders also experience other benefits in terms of tax gains (Michigan, 2003).  This is because cash is taxed as capital gain thus generating tax efficiency to the shareholder which is contrary to cash dividend. It is also important to note that even though, the price of new ford shares would decrease, shareholders will not be prone to any loss since the decrease in share prices will be offset by the $20 cash they receive. However, it is worth noting that the company will tend to reduce the dividend payment. The new ford shares will tend to fall due to the fact that the company will tend to hold a constant dividend payout ratio. The shareholders taking the cash option of $20 will remain in the same situation as before the VEP but the total dividend payment is nevertheless expected to reduce significantly. The effect of cash option is similar to that of share repurchase, the number of new shares outstanding will reduce; thus,  earning per share (EPS) will increase and it can increase the overall demand for Ford’s share, which will benefit share price in the long run.

If stock option is selected over the cash option, the voting powers and control in Ford Company on the part of the shareholders is expected to increase substantially. In case f cash option, the share prices is expected to register significant increase, this will subsequently benefit the shareholders for enabling them hold more new Ford shares. In case the shareholders opt for the combination of both cash and new shares, it is also beneficial since they can invest the cash in other profitable investments and still have interest in the company. There also tax benefits from capital gains from cash received, enjoy profit from the increased share prices and enjoy control and ownership in the firm.

In essence, it is important and recommendable to implement the value enhancement plan in the Ford Company. There several benefits in terms of tax effect and the general welfare of the shareholders such as increase in the control of the firm’s activities. Since the VEP is a win-win situation for both the shareholders and the company, it is advisable for the ford company to continue implementing the program (Michigan, 2003).

Choices for Different Shareholders

Ford Motor Corporation has different classes of share owned by different investors. These investors include the ford family members, institutional investors such as the Calpers and TIAA-Cref and regular outside shareholders. These different shareholders will have different effects from the choices the company make on VEP implementation.

For instance, if Ford family member investor will opt the stock option since this will provide a leeway to expand control in the company. If the ford family supports the VEP, putting in consideration that they own over 40% of the company’s voting power will remain unchanged. However this will be accompanied by a significant decrease in their equity from 5% to 3.6%. However a stock option will increase the common shares and subsequently increasing their voting power (Michigan, 2003).

Institutional investors (TIAA-Cref and Calpers) are likely to choose a combination of both cash and shares. This is because it is in futile to compete with the Ford family in the control of the firm even if they re-invest the $ 20 cash in buying of new shares. Having considered this, it is important for such investors to choose a combination of both cash and share. This will enable them to invest the cash in other profitable investment and still retain interest in the company (Michigan, 2003).

The other category of investors in the ford motor corporation is the regular outside shareholder. This group of shareholder does not care about control and voting powers within the firm but their main aim is maximizing profit on their invested equity. As a result, It is advisable for such group of investors to have the cash option. This is because Ford Motors Corporation seems to have few growth opportunities and has limited profitable projects. It is for this reason that the regular investor would opt to have his cash back which can be re-invested in other profitable activities (Michigan, 2003).

Reference

 Michigan University. (2003). Standard & Poor’s Creditweek. Standard & Poor’s Creditweek, 23(45-52), 2-15.

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