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General motors

General motors. Module 11: Adjusting Accounting Information. Enterprise operations. General Motors. Client Strategy Template: GM. Strategies.

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General motors

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  1. General motors Module 11: Adjusting Accounting Information

  2. Enterprise operations General Motors

  3. Client Strategy Template: GM Strategies Growth Strategy:Focus on “alternative propulsion strategies” (hybrid, electric, FlexFuel, hydrogen fuel cell) in an attempt to create environmental diversity and fuel efficiency throughout product line Financial Goals & Operating Priorities:Aim to be the industry leader in fuel efficiency, pursue top market share in both domestic and global market Characteristics of the Business Major Business Units: GMNA, GME, GMIO, GMSA, GM Financial Markets: Automotive assembly and manufacturing, financial services (leases, contracts), automotive safety technology Products: Chevrolet, GMC, Buick, Cadillac, OnStar technology, GM Financial services Customers: Auto wholesalers, Rental car agencies, Authorized dealerships Competitors:Toyota, Ford, Nissan Strategic Alliances/Joint Ventures: Mostly concentrated in China Potential Adverse Influences: Constant technology innovation, oil prices, raw material prices, government regulation, dependence on suppliers, product recalls (safety issues)

  4. Markets & products • Auto brands • Chevrolet • GMC • Buick • Cadillac • OnStar (wholly owned sub) • GM Financial • Formerly AmeriCredit Corp • Strategic Alliances • Concentrated in China • JV with SAIC Motor

  5. Parsimonious Forecasting General Motors

  6. Break down RNEA Enterprise Profit Margin (EPM) -Measure of profitability -How much operating profit does the firm earn from each sales dollar? -Used EPM from sales Enterprise Asset Turnover (EAT) -Measure of efficiency -What level of sales does the firm realize from each dollar invested in enterprise assets?

  7. Parsimonious assumptions

  8. Valuation using cash flows • FCF = EPAT - ∆NEA • Discount rate  10% • Enterprise Value = 109,146

  9. Cost of capital & valuation General Motors

  10. Cost of enterprise capital • rEnt = (rD * VD/VEnt) + (rEq * VEq/VEnt) • Cost of equity = 12.6% • Cost of debt = 1.92% • Calculated WACC = 11.89%

  11. Valuing GM • Estimate of Enterprise Cost of Capital = 11.89% • Enterprise Value = 89,184

  12. Checking our figures • Enterprise value remains $89,184 throughout all models

  13. Financial Report Analysis General Motors

  14. Sales & Revenue • GM Financial experiencing huge growth after acquisition of Ally Financial’s international operations

  15. GM Financial Receivables • Increase in GM Financial’s receivables accounts for large portion of increase in NEA • Provides insight into company’s fluctuating EATO

  16. Impact of GM financial Growth • Increase Enterprise Assets  Increase NEA  Lower EATO  Lower entity value (Sales remaining relatively constant)

  17. Accounting Methods General Motors

  18. Adjustment A: Inventory • Footnote 6: No inventory for which GM reports using LIFO

  19. Auto Industry Inventories • Ford  20% of inventory accounted for using LIFO method • Honda  primarily on a FIFO basis • Toyota  “average cost” system, with some LIFO basis disclosed

  20. Adjustment B: Operating Leases GM Financials  No footnote pertaining to lease obligations Instead, look to page 57 of MD&A

  21. Payments Due • From MD&A • Information provided is not sufficient to calculate an implied interest rate • Divide payments equally? • Capital lease PV figure includes additional debt amounts?

  22. Additional Info on Operating Leases • Footnote 17 (Commitments and Contingencies) More detailed breakdown of payments due each year

  23. GM’s Estimated Lease Liability • Using discount rate of 14.54% • Omitted asset and liability related to recording leases as operating rather than capital is $734 million • Increase NEA by $734 • Increase financing liabilities by $734

  24. Effect on EPAT • Removal of operating lease payments (rent expense) • Subtract $477 million • Reclassify as interest expense & depreciation • $734 * 14.54% = $107 interest expense • $477-$107 = $370 depreciation • Net impact on EPAT (remove rent expense, add depreciation expense) • (477 - 370) (1-.37) = 67 • Conclusion  need more detailed disclosures; impact of capitalization does not appear to be substantial to understanding of GM’s enterprise operations

  25. Adjustment C: Special Purpose Entities Asset securitization • Common in financial subsidiaries of manufacturing companies • Important source of liquidity

  26. Adjustment D: Share-Based Compensation • GM stock incentive plan centers on RSUs (Restricted Stock Units) • Hybrid between stock options and restricted stock • Promise to grant restricted stock at some point in future • Still rebuilding this portion of employee benefits following bankruptcy and IPO in 2009

  27. Questions?

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