General Motors Corporation
Case 4 Questions
1. Estimate GM's cost of equity using data in the case. Specifically, you should draw on available approaches for estimating this cost, including: (a) earnings capitalization, (b) constant dividend growth, (c) risk premium, and (d) CAPM. What might account for the differences among the estimated costs of capital yielded by these approaches? What are the relative strengths and weaknesses of each approach? What should be the equity hurdle rate for the entire firm?
2. Estimate the cost of equity for: (a) the automotive division, (b) General Motors Acceptance Corporation, (c) Hughes Aircraft, and (d) Electronic Data Systems. Recommend an equity hurdle rate for each division.
3. In principle, should a divisional hurdle rate be different from a corporate-level hurdle rate? Why? If you think it should, what administrative problems might multiple hurdle rates create? If you think that it should not, what are the implications for corporate resource allocation over the long run?
4. What is the interdivisional effect of GM's decision to offer 2.9 percent automobile loans instead of cutting unit prices? What are the possible benefits of such a policy? Will equity investors value these benefits? (i.e., bid up the share price?)