General Motors Corporation, 1988 (a)

Abstract

In the spring of 1988, GM is being criticized for poor financial performance. The student must evaluate corporate performance and identify the underperforming divisions. The case provides an opportunity to exercise a range of equity-pricing models: CAPM, APT, dividend growth, and earnings/price. The challenges in deriving an equity cost come to the forefront. Student and instructor spreadsheet files are available for use with this case and teaching note. Excerpt UVA-F-0789 GENERAL MOTORS CORPORATION, 1988 (A) In the spring of 1988, some observers were arguing that General Motors had misallocated its capital over the previous few years, and critics contended that GM's core business, automobile manufacturing, was the main arena of value destruction within the company. Among the automotive hands within the company, the criticism was apostasy. To long-time employees, GM was the virtual embodiment of the automobile industry, and to question GM's continuing investment in its automotive division was to challenge its very corporate identity. The debate over GM's performance focused on two specific topics. First, both the company's defenders as well as its critics wished to establish the soundness of GM's continued massive investment in its core automotive business, an investment which totaled roughly $ 40 billion in the 1980s alone for tooling, facilities, and product design. In order to assess this investment correctly, it would be necessary to determine the appropriate cost of capital for General Motors Corporation as a whole and also for GM's major non-automotive operating divisions. Second, in the spring of 1988 there were those who suspected that GM was attempting to overcome shortcomings in its automotive performance by shifting profits to other divisions such as its financing subsidiary General Motors Acceptance Corporation (GMAC) and its consolidated data-processing services division Electronic Data Systems (EDS). The Company In 1988 General Motors was composed of three major consolidated entities and one major unconsolidated operation, GMAC. The three consolidated divisions were, in order of revenues, the automotive operation (identified as GMC in this discussion to distinguish the corporation's automotive activities from the performance of GM, the consolidated corporate entity), the aerospace and electronics operation General Motors Hughes Electronics (GMHE) and Electronic Data Systems (EDS). GMC had 31 major operating divisions including its North American nameplates Chevrolet, Pontiac, Oldsmobile, Buick, Cadillac, and GMC Truck, and GMHE had two divisions, Hughes Aircraft Company and Delco Electronics Corporation. . . .