Reference no: EM132770044

Falling Short of Expectations

• For years, General Electric was perhaps the most admired company in the world. From 1990 through 2000, its stock rose more than 800 percent, making it one of the world's most valuable companies and earning its long-time CEO, Jack Welch, the title of "Manager of the Century" from Fortune magazine. GE's stock price peaked in August 2000 at $60.50.

• Since then, however, GE stock has lost its luster, falling by roughly 50 percent and trailing far behind benchmarks such as the Standard & Poor's 500 Stock Index. In 2009, GE cut its dividend for the first time since the Great Depression and lost its coveted AAA credit rating. When a firm's operating results disappoint investors, its stock price will fall as investors sell their shares and move to a more attractive investment. As one expert explained, "GE has been destroying shareholder capital for years. Their cost of capital is about 5 percent, and their return on assets is about 1 percent. That mathematic equation can't remain too much longer." For companies to succeed, their investments have to earn a rate of return that exceeds investors' expectations.

Required:

Problem 1. Describe the financial strategies and financial performance of General Electric from 1990 to 2000.

Problem 2. Describe the financial performance of General Electric from 2001 to 2009.

Problem 3. Why did General Electric perform so poorly from 2001 to 2009? What contributed to the loss of GE's AAA credit rating?

Problem 4. How do companies know what investors expect?

Problem 5. If you were the Chief Financial Officer, what things should have you done to mitigate the effects of the 2007-2008 global financial crisis going to 2009?