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Module 6: Cost of Capital and Valuation

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Module 6: Cost of Capital and Valuation

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  1. Module 6: Cost of Capital and Valuation

    The Ford Motor Company By: Paula Casini
  2. Ford Motor Company Automotive Sector – sale of vehicles, service parts and accessories Ford North America Ford South America Ford Europe Ford Asia Pacific Africa Financial Services Sector Ford Motor Credit Company – vehicle related financing, leasing and insurance Other Financial Services – holding companies and real estate
  3. Products and Services Brand Name Vehicles: Ford and Lincoln Retail Sales Fleet Sales Vehicle Financing Automotive Components Market Share = 14.0%
  4. Cost of Equity Capital Captures the risk to the company’s equity holders of getting distributions (dividends or increases in share price) Measure using the Capital Asset Pricing Model (CAPM) Req = Rrf + [B * (Rmkt – Rrf)]
  5. Range: 0.73 – 2.6 Mean: 2.00 Beta Estimates Google 2.20 NASDQ 0.73 MSN 2.19 Reuters 2.55 Yahoo 1.32 Scottrade2.6 NYSE 2.55 TDAmeritrade 2.5 First Trade 1.33 Zacks 2.20 Valueline 1.35 CNBC 2.55
  6. Analysis of Bloomberg Beta Standard Error = 0.207 Raw Beta = 1.241 95% confidence interval: 1.034 to 1.448 Adjusted Beta = 1.160 95% confidence interval: 0.953 to 1.367
  7. Regression of Beta
  8. Beta Summary Mean Beta from other sources = 2.00 Beta Range from other sources = 0.73 to 2.6 Bloomberg Beta Raw Beta = 1.241 Adjusted Beta = 1.160 Beta Confidence Intervals from Bloomberg Raw Beta = 1.034 to 1.448 Adjusted Beta = 0.953 to 1.367 Beta Confidence Interval from Regression 1.19 to 3.29 Beta used for WACC = 1.241
  9. Risk Free Rate 30 year Treasury yield 3.66% As of Monday, February 11, 2014
  10. Market Risk Premium Difference between market return and risk free rate Market risk premium = 5% Market risk premium can range from 3% to 8%
  11. Cost of Equity Beta = 1.241 Risk free = 3.66 Market risk premium = 5.00 CAPM Req = Rrf + [B * (Rmkt – Rrf)] Req= 3.66 + [1.241 * (5.00)] Cost of Equity = 9.865%
  12. Cost of Debt Capital Captures the risk to the company’s debt holders of default Cost of Debt = 0.465%
  13. Weighted Average Cost of Capital WACC = [rD * (VD/VENT)] + [rE * (VE/VENT)]
  14. Original DCF
  15. Updated DCF

  16. Questions?