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Lin Ouyang

February 18th, 2009


FE 449 – Professor Michel

External Funding Needs of Ford Motor Co

Ford Motor Co will need $24.57 billion in external financing for 2009. The company and
analysts are both predicting serious declines in automobile sales and profits for the
upcoming year. Analysts on average estimate Ford will lose $3.18 per share in the year
2009. In this tough economic climate, Ford will need to somehow raise $24.57 billion or
risk bankruptcy (Exhibit A).

Ford’s working capital will significantly increase in 2009


Ford Motor Co’s underwriting of loans and operating leases to help finance auto
purchases creates a huge finance receivables account that does not vary quickly with auto
sales (Exhibit B). As short-term debt, payables, and current accrued liabilities shrink in
tandem with lower sales, current assets stay relatively the same because of a large,
stagnant receivables account. Working capital, as a result, balloons (Exhibit C).

To deal with the increasing working capital, on February 3rd, 2009, Ford tapped into the
unused $10.1 billion of their $11.5 billion secured revolving credit facility to help ease
their financing needs. However, given this current analysis, Ford Motor Co will need at
least $14.07 billion more to avoid insolvency.

Notes on EFN Analysis


External funding need for Ford Motor Co was determined by the percentage sales
method. Accounts deemed variable to sales were estimated by calculating a historic
percentage of sales multiplied by the expected 2009 sales. Expected earnings are added
into retained earnings and the difference between the projected assets and liabilities &
shareholder equity determines the external funding needed.

Some notable aspects of the analysis are:

FY08 3rd quarter balance sheet was adjusted to estimate the 4th quarter
Ford’s 2008 fiscal year balance sheet was estimated by adjusting the third quarter
September 30th, 2008 balance sheet to reflect the fourth quarter financial results released
in the January 29th, 2009 8-K. Though this resulted in a balance sheet that does not
balance, adjustments needed to be made to bring the third quarter balance sheet as close
as possible to the income statement released in the 8-K. I believe these adjustments have
improved the accuracy of estimating Ford’s cash and retained earnings account for 2009
projections

In the adjusted 2008 balance sheet, cash and cash equivalents were revised down by $7.2
billion to $17.694 billion due to an operating cash outflow in the fourth quarter. Retained
earnings were revised down by $5.875 billion to -$16.044 billion due to the fourth quarter
net loss.
Receivables and operating leases were not deemed to vary with sales
Ford Motor Co’s Financial Services sector underwrites loans to finance auto purchases,
and leases automobiles. The loans and leases are securitized, but do not meet accounting
requirements to be left off the balance sheet. Since the principal on these loans are paid
over years instead of within a year, receivables and operating leases for 2008 were simply
carried over to 2009 projections instead of being adjusted to reflect changes in sales.

Some projections for Ford’s FY09 liabilities were based on FY07 data
Fiscal year 2007 data was used to estimate Ford’s liabilities for 2009. Though the most
recent information on Ford Motor Co’s balance sheet is the September 30th, 2008 10-Q
filing, specific break downs of the accrued liabilities and debt is not provided. Not all
accrued liabilities vary with sales such as accrued employee benefit plans or other
postretirement employee benefits. To achieve better estimates for liabilities next year,
data from Ford’s 2007 fiscal year 10-K was taken and analyzed.

Looking at Exhibit D, accounts bolded are deemed to vary with sales. Their percentage
of sales figure was multiplied with the projected 2009 revenue to estimate their values.
All non-current accounts were then added in to come up with the projected “Accrued
liabilities & deferred revenue” and “Debt” accounts. Current accrued liabilities and long-
term debt payable within one year were not added back in because presumably, they were
paid off in 2008.