FIN 301 SLP 5 –FORD MOTOR COMPANY
Introduction
Ford Motor Company is a multinational corporation headquartered in Detroit, Michigan in the United States of America. The principle business activity of the company is to manufacture, distribute and sell a wide range of vehicles. The company was founded by Henry Ford and on 6th June 1903 was incorporated as a limited liability company as per the then existing laws. The Company manufactures and distributes the Ford range of vehicles, trucks and buses and also Lincoln brand of vehicles (www.ford.com). The company also manufactures fuel efficient vehicles which include electric cars and other fuel efficient cars. The company has expanded globally and currently has operations in major countries of the world which include China, Japan, South Africa, Australia, Brazil, Norway, United Kingdom, Argentina etc. The current executive chairman of the board of the company is Mr. William Clay Ford who is a great grandson of Henry Ford the founder of Ford Motor Company (www.ford.com)
Financing options
The company is currently undertaking several activities and projects which require financing. One of the short term projects that require financing is research on developing and installing drive assist technologies in vehicles. Recently the company unveiled an automated Ford Fusion Hybrid research vehicle that was to test and promote Ford Motor Company’s model for drive assist technologies. The company envisions manufacturing vehicles which provide autonomous functionality and advanced technologies (www.ford.com). These functionality and advanced technologies are to be developed in conjunction with the University of Michigan which has been carrying out research for the last 10 years. Several vehicle brands have been fitted with earlier versions of drive assist technologies which have been boosting sales. Drive in technologies enables cars to park on their own, assist with emergency braking, detect dangerous driving and recognize and understand the driver’s voice commands. The company’s dream on these technologies is to ultimately develop technologies which enable cars to be connected and are able to communicate with each other (www.ford.com). The company is confident that this functionality will provide safer driving, conserve the environment and lastly ease traffic congestions. The most appropriate source of funding for this type of activity is debt financing. This technology will enable the company to use differentiation as it strategic option once it succeeds. This is a blue ocean strategy which will enable the company to create its own market and make competition irrelevant (Saa-Requejo, 1996).
Debt financing will assist in protecting the invention and keeping the invention as a trade secret which will be revealed on a need to know basis. This is because debt providers will not be involved in the daily operations of the company. The company is currently manufacturing cars fitted with different capabilities provided by this technology. This is likely to increase sales levels which generate enough cash flow to repay the monthly loan repayment installments.
Equity financing on the other hand will is not ideal for this project (Saa-Requejo, 1996). This is because equity financing terms and conditions require the original shareholders to cede some of their stake to the equity financiers. This can let so many people into the new technology which will increase the risk of the technology being copied by the competitors. Again this is a big source of competitive advantage and offers lucrative investment opportunities. The projected sudden growth in sales once the completed drive assists revolutionary technology is unveiled far outweighs costs incurred in developing it (Saa-Requejo, 1996). It may also not be easy to raise equity financing since investors are generally risk averse and will shun away from untested technology since they are not sure whether it will be bought (Chiang &Hanke, 2010).
The second project that the company is currently undertaking is manufacture of electric cars. This is an eco-friendly project which will resonate well with equity financiers. This is because many people in USA are constantly reminded about the devastating effects of global warming. Global warming is caused by chlorofluorocarbons released into the atmosphere by companies of which Ford Motor Company is one of them. Some of the adverse effects of global warming include super storms, hurricanes, tornadoes, floods, droughts and famines. In recent year the United States of America’s government has been demanding that companies economize on fuel usage and adopt technologies that save on fuel (www.ford.com).
The company assumes that sales of the electric cars will make up a big portion of its revenues in future and will enable the company to stop relying on pickup trucks and SUVs for a big portion of its annual revenues (Saa-Requejo, 1996). The company has already partnered with Coulomb Technologies in this regard. Coulomb Technologies has undertaken to provide about 5000 free in-home charging stations to enable customers recharge their batteries. The most ideal financing is equity financing. This is because this project requires large amounts of capital outlay and will require a large source of financing which can be availed by equity financiers (Young, 2007). The duration of the project is projected to be up to 2035 which will hold assets for far too long in case of debt financing. These assets are needed to raise working capital to smoothen operations of the company and it would not be prudent to charge them for too long to one financier. The certainty of cash flows from the electric cars is not certain and as such cannot be relied upon to settle large loan repayment installments. It is not clear whether there will be adequate demand for the new cars. Equity financing is ideal because it does not require scheduled loan repayment as investors share dividends at the end of the trading period (Chiang &Hanke, 2010;Young, 2007).
References
Chiang, W., Di, H., &Hanke, S. A. (2010).Debt or equity financing?analyzing relevant factors. The Tax Adviser, 41(6), 412-417. Retrieved from http://search.proquest.com/docview/521247918?accountid=45049
www.ford.com
Young, V. M. (2007). DEBT, EQUITY FINANCING QUESTION BECOMING MORE DIFFICULT.WWD, 194(59), 20. Retrieved from http://search.proquest.com/docview/231195416?accountid=45049
Saa-Requejo, J. (1996). Financing decisions: Lessons from the spanish experience.
Financial Management, 25(3), 44-56. Retrieved from
http://search.proquest.com/docview/208178576?accountid=45049
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