First Draft Section 8 Essay

In this section I believe that a more accurate picture is drawn by splitting our analysis of

GM’s financial strategy into separate years, namely those covered by this paper [2007-2010] and

by separate lines of inquiry. Firstly, the period in question is a time of great change for GM and

secondly, the period was a time of tremendous economic uncertainty. Our first line of inquiry is

the method by which GM has financed its operations; unfortunately, the current assets and

current liabilities for 2007 and 2008 are unavailable.

GM financed its operations by taking on enormous amounts of debt. GM had a debt to

invested capital ratio of over fifteen hundred in 2007. The following years showed impressive

improvement, with the debt to invested capital ratio declining to under one hundred by the next

year, under fifty in the year of restructuring and under one in 2010. Considering that in 2008, the

debt-to-asset ratio for GM increased over 2007, I must conclude that the company paid down its

debt by sale of major assets such as Allison Transmissions Co. and Suzuki Motors. During the

restructuring and bailout year the debt-to-asset ratio fell to one-fifth that of the previous year and

in 2010 almost completely collapsed. The Wall Street Journal’s Sharon Terlep reports, “General

Motors Co.'s finance chief is engineering a radical shift in the car maker's strategy—to pay off

virtually all its borrowing in a few years and keep debt at close to nothing.”1 GM pursued the

bailout, bankruptcy, and restructuring route likely because the alleviation of its crushing debt

was necessary to forgo incredibly high opportunity costs; high debt financing costs creates an

inability to invest in worthwhile ventures, which in a technologically rapidly changing industry

can quickly kill off one’s ability to compete. GM functioned off of internal cash flow in 2010 to

prevent a recurrence of the inadequate pre-restructuring capital structure; this analysis is backed

up by the WSJ. “Many car makers and parts suppliers are rethinking their use of debt since the
1
Terlep, Sharon. “GM Tries to Curb Debt Addiction.” The Wall Street Journal. Web. 15 December 2010.
financial crisis curtailed funding. But GM is in a peculiar situation. Debt is what helped sink the

company and now—as it has returned to the stock market—it needs to prove it is being run more

prudently…In wiping out most debt, GM hopes to cut the tie between sales levels and its ability

to invest in vehicles.”2 GM is endeavoring to reduce its dependence on the capital markets also in

order to reduce its financial risk and thus overall risk because of its recent experience with

excessive risk.

Dividend Policy

GM’s financing strategy was linked to its dividend policy. Its financing strategy was to

rely on internal cash flow to reduce loans and its dividend policy dovetails with nearly maximum

use of those cash flows to pay off loans. GM’s dividend policy in 2010 was to pay only class B

preferred stock dividends and not common stock dividends; as reported in the Wall Street

Journal, “GM's plan to return to the public markets includes preferred stock, which the company

will sell to raise funds, along with common shares, which will be sold exclusively by some of

GM's current shareholders, including the U.S. government. The company said no dividend is

currently planned to be paid on the common shares.”3 GM didn’t pay any dividends at all in the

year of restructuring. In 2007 and 2008 GM did pay relatively generously, especially in 2008

when its dividend yield was over fifteen percent. The company was at that point limited in its

freedom to have this policy, because as its prospects fell, its generous policies were one of the

few things keeping its stock price up. During its restructuring, GM took advantage of its rock-

bottom situation to reform its dividend policy for long-run growth.

2
Terlep, Sharon.””
3
Terlep, Sharon and Ftizpatrick, Dan. “GM’s IPO to Include Preferred Shares.” The Wall Street Journal. Web. 19
August 2010.