Why does ford have so much leverage

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Reference no: EM13900733

Ford Motor Company is the second largest automobile and truck manufacturer in the United States. In addition to manufacturing motor vehicles, Ford also provides vehicle-related financing, insurance, and leasing services. Historically, people purchase automobiles when the economy is strong and delay automobile purchases when the economy is faltering. For this reason, Ford is considered a cyclical company. This means that when the economy does well, Ford usu- ally prospers, and when the economy is down, Ford usually suffers.

The following information is available for three recent years (in millions except per-share amounts):

	2004	2003	2002
Net income (loss)	$3,487	$495	$(980)
Preferred dividends	$0	$0	$15
Shares outstanding for computing earnings
per share	1,830	1,832	1,819
Cash dividend per share	$0.40	$0.40	$0.40
Average total assets	$308,032	$293,678	$277,037
Average stockholders' equity	$13,848	$8,532	$6,511
Average stock price per share	$14.98	$11.95	$12.56

1. Calculate the following ratios for each year, rounding to one decimal place.

a. Rate earned on total assets

b. Rate earned on stockholders' equity

c. Earnings per share

d. Dividend yield (use average stock price)

e. Price-earnings ratio (use average stock price)

2. Calculate the leverage formula for 2004.

3. Why does Ford have so much leverage?

4. Explain the direction of the dividend yield and price-earnings ratio in light of Ford's profitability trend.

Reference no: EM13900733

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