Question: 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 usually 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):
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.