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Ford Motor Analysis

778 words - 3 pages

Ford Motor CompanyCompany OverviewFord Motor designs, develops, and manufactures automobiles worldwide. Ford Motor is one of the world's largest automakers. Ford Motor has two brands: Ford and the luxury line Lincoln. Ford generates more than half of its revenue from North America. The rest of sales come from Asia (21.23%) and Europe (21.47%). Just like all the other automakers, Ford Motor suffered from the global economic crisis and started to streamline its operations. Ford Motor sold three brand (Land Rover, Jaguar, and Volvo) and cut down the number of suppliers. Ford also shifted its focus to fuel efficiency and hybrid models such as Fusion. Ford is also expanding in emerging markets for growth, especially China, India, Brazil, and Russia. However, Ford had a rough year in 2012. Its revenues fell by nearly 2% from $136 billion to $134 billion. Its profits also plummeted by 72% to nearly $6 billion. Although Ford achieved a turnaround in 2013 with its profits increasing from $5 billion to $7 billion, its profits still fall short of expectations, less than 40% of 2011.DCF ValuationWe implemented the one-stage FCFF discount model because Ford Motor is a mature company growing at a stable rate. The following are assumptions for the DCF models:

Stable Growth

Length of growth period (year)


Growth Rate (%)


Debt Ratio (%)




Riskfree Rate (%)


Risk Premium (%)


After-tax Cost of Debt (%)


Tax Rate


Return on Capital (%)


Cost of Equity (%)


Cost of Capital (%)


The fundamental analysis shows that the growth rate of Ford is 1.55%. The terminal growth rate should not exceed the U.S GDP growth rate (3%). By levering the auto & motors industry unlevered beta (1.28), we found the beta of Ford to be 3.12. Ford's beta is high because of high leverage. We used the 10 year Treasury bond (2.73%) for risk-free rate and marginal tax rate (35%). As a credit rating for Ford's bond is BBB-, we added default spread of 2.0% to the risk free rate. The after-tax cost of debt is 3.07%. Using the CAPM method, we found that the cost of equity is 20.41%. After plugging in all the inputs into WACC formula, the cost of capital for Ford is 8.44%.Based on the above inputs the valuation was as follows
WACC (%)


Firm Valuation

$ 122,587.8

- Debt


- Minority Interest


- Warrants


+Cash and Cash equivalents




Share outstanding



$ 5.56

Sensitivity AnalysisThe drivers for Ford are the cost of capital and stable growth rate. The following table shows the sensitivity analysis with different growth rates (0.5%-8.5%) and cost of capital (7.4%-9.4%):

Growth Rate



























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