American Axle: Striving to Achieve Profitability in the Midst of Hostile Market Conditions
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Authors
Entwistle, James R. (Jim)
Issue Date
2009
Type
Thesis
Language
en_US
Keywords
Alternative Title
Abstract
This project is an investigative study of the capital structure of American Axle &
Manufacturing, a Tier-1 automotive supplier in Detroit, MI. From its beginnings in 1994,
the company grew rapidly throughout its first decade as a solo company, by expanding
overseas and becoming publicly traded in 1999 on the New York Stock Exchange.
During the mid-to-late 2000's, however, American Axle struggled financially due to an
overall decrease in demand for its products, resulting from surging oil prices, a weak US
economy, and a poor credit market. In an effort to cut costs, AAM announced wage and
benefit cuts for its American factory workers in February of 2008, which in tum led to a
United Auto Workers strike that lasted three months. Lost revenues from the strike,
combined with a declining stock value have led to severe decreases in AAM's equity
dollars over the past several months.
To make matters more difficult, AAM must also raise excess cash to re-tool its
plants and implement new technology in response to changing consumer tastes. The key
for American Axle to return to profitability is to use the cheapest means possible to raise
cash in the short-run to finance long-term investments, while exploiting its most
profitable market sectors by expanding operations in Asia and Brazil and downsizing its
unprofitable domestic operations. AAM's decisions on how to raise cash along with
where to expand affect its opportunity cost of capital, which is the expected return from
potential investments forgone by using liquid funds to invest in capital. AAM's
opportunity cost of capital is found by averaging American Axle's cost of borrowing
money (cost of debt) with the residual claim shareholders have on cash after the
company has paid down its obligations (cost of equity), all the while factoring in the
total values of its debt and equity dollars. This figure, which we find to be about 7.34%,
is American Axle's opportunity cost of capital. This is the minimum acceptable rate of
return AAM should accept on an investment, and it is the rate by which we discount
future cash flows to ascertain that a certain project has a positive net present value. By
using the NPV formula to compare and contrast certain projects, we can decide upon the
best possible investment to foster long-term growth for American Axle.
Description
32 p.
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U.S. copyright laws protect this material. Commercial use or distribution of this material is not permitted without prior written permission of the copyright holder.