Ford Forecast and Valuation

Introduction

In Part 1 of the project, we analyzed the financial performance of Ford and General Electric and

concluded that General Electric Co.’s operating earnings as a percentage of sales of goods and

services declined from 2016 to 2017 but then slightly increased from 2017 to 2018. Whereas the

Ford Common Size Income Statement shows the decrease in gross profit of the company in

terms of sale from the year 2017 to year 2018. General Electric Co.’s earnings (loss) from

continuing operations before income taxes as a percentage of sales of goods and services

declined from 2016 to 2017 and from 2017 to 2018. General Electric Co.’s net earnings (loss)

attributable to the Company as a percentage of sales of goods and services declined from 2016 to

2017 and from 2017 to 2018. In this part we will do financial forecast of Ford using different

valuation models and will analyze what is the existing performance of Ford and how much it is

worthy for at least next ten financial years.

Dividend Valuation

The price of the asset is calculated on the basis of the current value of some cash flow metric

using discounted cash flow (DCF) calculation techniques. Dividends are the cleanest and

simplest indicator of cash flow, as they are simple cash flows that hit the consumer directly. The

assessment shall be based on generic premises. Specific factors related to stock value can occur

and have been overlooked. In such a scenario, the actual stock price can vary considerably from

the calculation. If in investment decision-making, you want to use the calculated inherent stock

value at your own risk.

The Ford Dividend Forecast has been calculated using the PRAT model and also the Gordon

Growth Model. From the calculations we can see the different trends in the growth of Ford
Dividends for the next years. In the upcoming year, there seems a growth of 6.38% followed by

5.12% and 3.85% in the following years showing kind of decreasing trend in the growth of

Dividends of Ford. The dividend figures as shown in Annex-2 are calculated using PRAT Model

where we can see the calculations of Retention Rate, Profit Margin, Asset Turnover, and

Financial Leverage by making the year 2018 as the base year. Also the other factors that have

been considered are current price of share of Ford Motor common stock, last year DPS and

required rate of return for future forecasting purposes.

Free Cash Flow to the Firm

The value of the inventory is estimated in discounted cash flow (DCF) techniques based on the

present value of a measure of cash flow. Free cash flow to the company (FCFF) is generally

referred to as cash flow after direct costs and before capital providers are paid out. The analysis

is based on generic assumptions. Common factors related to stock value can be listed and

omitted here. In such a scenario, the real stock price can differ substantially from the estimate.

Do this at your own risk if you want to use the calculated intrinsic stock in the investment

decision-making process.

To calculate the Ford Motor FCFF we have also calculated the intrinsic value of Ford Motors

capital and its common stock as shown in Appendix-III. The FCFF has also been calculated

PRAT Model as shown in Appendix-IV and for this we have also calculated the EBIT, RR and

ROC and ROA.

Preferred Valuation Model

Assessment is at the center of most of what we do in accounting, whether it is business success

research or corporate governance issues or the analysis of multiple financial decision-making

principles for capital budgeting. The most preferred assessment method is said to be the FCFF

valuation system. The idea that an asset's value is the present value of the cash flows that you

expect to generate by maintaining it is neither new nor revolutionary. Although knowledge of the

compound interest goes back thousands of years, for centuries the concrete analysis of today's

value was blocked through religious bans on loans, which were treated as usury. The expansion

of the current value for corporate finance and investment from insurance and leasing can be

related to economic as well as cognitive instincts. In some way, the use of discounted cash flow

models is an act of faith. We assume that each resource has an intrinsic value and we seek to

measure the quality by looking at the fundamental values of an object. What is the quality

inherent? Consider the value that an all-knowing analyst will add to the commodity with right

now exposure to all available information and a flawless valuation template. Of example, no

such analyst exists, but we all strive to be as similar to this dream analyst as possible. The

dilemma is that none of us really understands what the true intrinsic value of an asset is and we

can not also say whether or not our lowered valuations of cash flow are close to the mark.

Conclusion

The most popular metric used in inventory pricing is the NTM P / Earnings ratio (earnings

price). P / E refers to the current share price in terms of earnings per share with market

expectations. It ratio is used to equate the stock value of a company with its profits. A high-P /

Earnings NTM business is perceived to be overvalued; a low-P / Earnings NTM corporation is

considered underrated. Ford Motor Company's P / Earnings NTM level is below the average of

its peer group: about 7.00. According to these metrics, Ford Motor Company's price is below the

peer group's market value. The Ford Motor Company's P / Earnings NTM ratio is slightly lower

than the average in its automotive sector: 9.12. The Ford Motor Company's rating according to
these indicators is well below the market valuation of its sector. Ford Motor Company's P /

Earnings NTM ratio is smaller than its previous5-year average: 7.4. The new Ford Motor

Company value is therefore below the median of its price over the last five years.
Appendix

Annex-I: “Ford Motor Dividend Forecast

Year Value DPS(t) or TV(t) Present value at

10.84%
0 DPS(0) 0.73
1 DPS(1) 0.79 0.71
2 DPS(2) 0.84 0.68
3 DPS(3) 0.88 0.65
4 DPS(4) 0.91 0.60
5 DPS(5) 0.94 0.56
6 DPS (6) 0.99 0.53
7 DPS (7) 1.03 0.49
8 DPS (8) 1.08 0.45
9 DPS (9) 1.12 0.41
10 TV9) 11.63 6.95
The intrinsic value of Ford Motor Co.’s common stock (per
share) $10.15
Current share price $9.07

Assumptions for Required Rate of Return

Assumptions

Rate of return on LT Treasury Composite R(F) 2.14%

Expected rate of return on market portfolio E[R(M)] 11.61%
Systematic risk of Ford Motor Co.’s common stock β(F) 0.92

Required rate of return on Ford Motor Co.’s common

stock r(F) 10.84%
 In above:

Unweighted average of bid yields on all outstanding fixed-coupon U.S. Treasury bonds neither due
or callable in less than 10 years (risk-free rate of return proxy).

rF = RF + βF [E(RM) – RF]
= 2.14% + 0.92 [11.61% – 2.14%]
= 10.84%

Annex-II: Dividend Grwoth Rate

Average Dec 31, Dec 31, Dec 31, Dec 31, Dec 31,
2018 2017 2016 2015 2014

Selected Financial Data (US$ in millions)

Cash dividends declared 2,915 2,584 3,376 2,380 1,952

Net income attributable to
Ford Motor Company 3,677 7,602 4,596 7,373 3,187
Automotive revenues 148,294 145,653 141,546 140,566 135,782
Total assets 256,540 257,808 237,951 224,925 208,527
Equity attributable to Ford
Motor Company 35,932 34,890 29,170 28,642 24,805

Financial Ratios

Retention rate 0.21 0.66 0.27 0.68 0.39

Profit margin 2.48% 5.22% 3.25% 5.25% 2.35%
Asset turnover 0.58 0.56 0.59 0.62 0.65
Financial leverage 7.14 7.39 8.16 7.85 8.41

Averages

Retention rate 0.44

Profit margin 3.71%
Asset turnover 0.60
 Financial leverage 7.79

Dividend growth rate (g) 7.65%

In above:

2018 Calculations

Retention rate = (Net income attributable to Ford Motor Company – Cash dividends declared) ÷ Net
income attributable to Ford Motor Company
= (3,677 – 2,915) ÷ 3,677 = 0.21

Profit margin = 100 × Net income attributable to Ford Motor Company ÷ Automotive revenues
= 100 × 3,677 ÷ 148,294 = 2.48%

Asset turnover = Automotive revenues ÷ Total assets

= 148,294 ÷ 256,540 = 0.58

Financial leverage = Total assets ÷ Equity attributable to Ford Motor Company

= 256,540 ÷ 35,932 = 7.14

g = Retention rate × Profit margin × Asset turnover × Financial leverage

= 0.44 × 3.71% × 0.60 × 7.79 = 7.65%

Dividend growth rate (g) implied by Gordon growth model

g = 100 × (P0 × r – D0) ÷ (P0 + D0)

= 100 × ($9.07 × 10.84% – $0.73) ÷ ($9.07 + $0.73) = 2.58%

where:
P0 = current price of share of Ford Motor Co.’s common stock
D0 = the last year dividends per share of Ford Motor Co.’s common stock
r = required rate of return on Ford Motor Co.’s common stock
Annex-III: Ford FCFF Forecast

US$ in millions, except per share data

Year Value FCFF(t) or TV(t) Present value at
4.02%
0 FCFF(0) 11,232
1 FCFF(1) 11,385 10,945
2 FCFF(2) 11,449 10,581
3 FCFF(3) 11,422 10,148
4 FCFF(4) 11,304 9,655
5 FCFF(5) 11,097 9,112
6 FCFF(6) 11,220 8,711
7 FCFF(7) 11,193 8,251
8 FCFF(8) 11,166 7,792
9 FCFF(9) 11,139 7,333
9 TV(9) 186,106 152,812
Intrinsic value of Ford Motor Co.’s capital 203,253
Less: Debt (fair value) 152,825
Intrinsic value of Ford Motor Co.’s common stock 50,428

Intrinsic value of Ford Motor Co.’s common stock (per share) $12.87
Current share price $9.07

Annex-IV: FCFF Growth Rate

Average Dec 31, Dec 31, Dec 31, Dec 31, Dec 31,
2018 2017 2016 2015 2014
Selected Financial Data (US$ in
millions)
Interest expense 1,228 1,133 894 773 797
Net income attributable to Ford 3,677 7,602 4,596 7,373 3,187
Motor Company

Effective income tax rate

(EITR) 15.00% 6.40% 32.20% 28.10% 37.70%

Interest expense, after tax 1,044 1,060 606 556 497

Add: Cash dividends declared 2,915 2,584 3,376 2,380 1,952
Interest expense (after tax)
and dividends 3,959 3,644 3,982 2,936 2,449

EBIT(1 – EITR) 4,721 8,662 5,202 7,929 3,684

Automotive debt payable

within one year 2,314 3,356 2,685 1,779 2,501
Ford Credit debt payable
within one year 51,179 48,265 46,984 41,196 36,671
Automotive long-term debt
payable after one year 11,233 12,575 13,222 11,060 11,323
Ford Credit long-term debt
payable after one year 88,887 89,492 80,079 78,819 68,676
Other long-term debt payable
after one year 600 599 — — —
Equity attributable to Ford
Motor Company 35,932 34,890 29,170 28,642 24,805
Total capital 190,145 189,177 172,140 161,496 143,976

Financial Ratios

Retention rate (RR) 0.16 0.58 0.23 0.63 0.34

Return on invested capital
(ROIC) 2.48% 4.58% 3.02% 4.91% 2.56%

Averages
 RR 0.39
ROIC 3.51%

FCFF growth rate (g) 1.36%

2018 Calculations

Interest expense, after tax = Interest expense × (1 – EITR)

= 1,228 × (1 – 15.00%) = 1,044

EBIT(1 – EITR) = Net income attributable to Ford Motor Company + Interest expense, after tax
= 3,677 + 1,044 = 4,721

RR = [EBIT(1 – EITR) – Interest expense (after tax) and dividends] ÷ EBIT(1 – EITR)
= [4,721 – 3,959] ÷ 4,721 = 0.16

ROIC = 100 × EBIT(1 – EITR) ÷ Total capital

= 100 × 4,721 ÷ 190,145 = 2.48%

g = RR × ROIC
= 0.39 × 3.51% = 1.36%

Ford FCFF Growth in Single Stage Model

g = 100 × (Total capital, fair value0 × WACC – FCFF0) ÷ (Total capital, fair value0 + FCFF0)
= 100 × (188,370 × 4.02% – 11,232) ÷ (188,370 + 11,232) = -1.83%

where:
Total capital, fair value0 = current fair value of Ford Motor Co.’s debt and equity (US$ in
millions)
FCFF0 = the last year Ford Motor Co.’s free cash flow to the firm (US$ in millions)
WACC = weighted average cost of Ford Motor Co.’s capital”