Ford Motor Company

Apply: Signature Assignment: Financial Plan
Assignment Content

Prepare a financial plan for the company you select for your business plan. This financial plan will be included in your final business plan in your capstone course.

Describe the business, including the type of business.

Create a business case.

Determine why funding is needed for the company.
Determine the sources of funding. Consider self-funding, borrowing, equity, venture capital, etc.
Evaluate the requirements of each funding source you determined appropriate.
Analyze the associated risks of each funding source.
Decide which sources are the best fit for your company based on the requirements of each. Justify your decision.
Estimate the cost of capital for both short-term and long-term funding sources. Research current estimated APRs for your selected sources of funding. Consider creating a table or chart to display this information.

Create a profit-and-loss statement for a 3-year period—project revenue, stating realistic assumptions, such as growth per year, in your projections.

Estimate direct costs, including the capital, marketing, labor, and supply costs.

Cite references to support your assignment.

Format your citations according to APA guidelines.

Submit your assignment.

ANSWER

Signature assignment: Financial plan

Business description

            Ford Motor Company is an automotive company headquartered in Michigan, United States of America. The American-based global company manufactures, services, designs and markets Ford products such as trucks, sport utility vehicles (SUVs), luxury vehicles and cars. It ranked 12^th in Fortune 500 companies of the US in 2019. It was founded in 1903 by Henry Ford, and has since grown to be among the best-performing automobile manufacturers worldwide. Ford operates four segments, namely the Automotive segment (sale of vehicles, parts and accessories), Financial Services segment (financing and leasing vehicles), Fort Smart Mobility segment (investing, growing, designing and building mobility services) and Central Treasury Operations segment (investment decision-making, financing Automotive segment and risk management). The company looks forward to expanding further, thus needs a financial plan to be incorporated in the business plan. This paper comes up with a financial plan for Ford Motor Company (FMC).

Why Ford Motor Company needs funding

For a business to be financially healthy, sustainable and well developed, it needs sufficient working capital and initial capital. A company like Ford is doomed to fail if it lacks sufficient operating capital. Sources of funds for a business can either be internal or external to enable it to meet its financial need and obtain sufficient capital to achieve its ambition to grow. Thus, Ford requires significant funding, both internally and externally, to be able to expand and manage operations, as well as remain healthy financially.

Funding FMC: Sources, Requirements and Related risks of funding

Retained earnings

Retained earnings are the re-invested portion of profit that is not paid out to shareholders as dividends. It is an internal source of funds. The only requirement it has is that before deciding on the amount of profit to be retained, it can be determined that investors will receive dividends of reasonable amount (Carter, Macdonald, & Cheng, 1997). Cost of capital for retained earnings is minimal as it is only a decision made by management on the amount to be retained. Shareholders are not consulted and issue costs are not involved. As Ford makes a decision on whether to use retained earnings as a source of funding, it is faced with the risk that they may be insufficient to meet Ford’s funding needs and may cause the dividends available for payout to shareholders to be too little.

Equity capital

Equity capital is an external source of funds that involves issuing shares to shareholders. The shares may be preference shares or ordinary shares and the shareholders may either be new or already existing. Equity capital requires that if management decides to raise funds through shares, they have to be sold at a price. The price of shares issued for cash must greater than or equal to their nominal value if they are to provide funds for the company. The risk that Ford may face if it chooses this source of funding is that depending on the stake sold to shareholders, the company may lose control of the business. It also has to divide its profits to share with investors in form of dividends and may have to deal with the agency problem, whereby shareholders’ interests sometimes conflict with managers’ interests.

Debt

Ford may decide to obtain funds through borrowing from a bank or other lender. Nominal value, interest payable and security are the components of a loan. For Ford to obtain funding through a loan, it is required to prove its credit-worthiness. Its level of gearing must be reasonable and they must have an asset that they can use as collateral. This type of funding is risky in that it may require high-interest payment, may provide limited funds and puts the company’s assets at risk.

Venture capital

            Venture capitalists provide funds by injecting recoverable money into a business in exchange for a management buy-out or equity stake. They first screen the company to identify if it is worthy to be funded. Venture capitalists would require that Ford gives them an equity stake in the company and may require to be represented by one of their own on the board of Ford Motor Company. Several risks are associated with funding through venture capital. First, the equity stake required may be too high that control of the business is lost to the venture capitalist. The screening process may cause Ford to be denied funds based on the funder’s judgment and the capitalist may demand a high return on investment.

Debentures

              Debenture capital is a type of loan secured with the company’s assets. A company often chooses this source of funds when it is unable to obtain debt without any form of collateral. It requires that a formal acknowledgment is written to show that there are debt, interest, and capital due for repayment. If Ford takes up this option, it faces the risk of having no flexibility during interest payment, resulting in compromised business growth. Assets belonging to Ford may also not be used as wished since they are acting as security for the debenture.

Finance leases

            The parties involved in a finance lease are the lessor, who is the provider of the asset, and the lessee, who leases the asset. The asset may be provided directly to the lessee or through a dealer.  Regular payments are paid to the lessor or the dealer based on the lease agreement. Ford may need to make use of some assets that they cannot acquire fully, thus opting for a finance lease. The requirement for this form of funding is making regular payments to the lessor to allow Ford to use the assets. If Ford is unable to continue making regular payments, it faces the risk that they may not be able to continue using them for as long as they had desired.

The best source of funding for FMC

            Equity and retained earnings are the most preferable sources of funding for Ford. The consolidated financial statements for Ford Motor Company and its subsidiaries in 2019 showed that only 4,011 million out of 6 billion authorized shares of common stock had been issued while only 71 million out of 530 million authorized shares of class B stock had been issued. More stock can be issued to obtain funds for various uses in expanding Ford’s business (Ford Motor Company, 2019). Retained earnings were also significantly higher than the value of equity capital. Ford should also consider using a portion of retained earnings to finance its business. In 2019, retained earnings were $22,165 million while common &class B stock was worth $41 million. Debt is not a suitable source of funding for this year, since Ford already holds a high amount of debt (over $150 billion), giving a significantly high debt to equity ratio. The cost of venture capital is likely to be too high due to the requirement to compensate for the funder for the risk. Finance leases may be suitable for assets that Ford does not need to buy permanently or may not afford to purchase.

Ford’s estimated cost of capital for its financial sources

Ford’s cost of long-term Automotive debt was 7.27%, the cost of short-term debt 9.5% and cost of equity 18.7% for 2019 (Finbox, 2020).

Projected profit and loss statement for FMC

            Ford’s projected profit and loss statement is based on projections obtained from the trend observed in the last 3 years; 2017, 2018 and 2019. For the years 2020, 2021 and 2022, the following growth rates were used.

References

Carter, S., Macdonald, N. J. & Cheng D. C. B. (1997). Basic finance for marketers: Marketing     and Agribusiness-1: Retrieved from:         http://www.fao.org/3/w4343e/w4343e08.htm#chapter%207%20%20%20sources%20of%      20finance

Finbox. (2020). The Complete Toolbox for Investors | finbox.com. Retrieved 25 October 2020,    from             https://finbox.com/NYSE:F/explorer/cost_equity#:~:text=Ford%20Motor’s%20cost%20o f%20equity%20is%2018.7%25.

Ford Motor Company. (2019). Ford Motor Company 2019 Annual Report [Ebook]. Retrieved      from https://s23.q4cdn.com/799033206/files/doc_financials/annual/Ford-2019-Printed-  Annual-Report.pdf