Aswath Damodaran 453
The Consequences of Failing to pay FCFE
Chrysler: FCFE, Dividends and Cash Balance
($ 500 )
$ 0
$ 500
$ 1 , 000
$ 1 , 500
$ 2 , 000
$ 2 , 500
$ 3 , 000
1985 1986 1987 1988 1989 1990 1991 1992 1993 1994
Year
Cas
h^ F
low
$ 0
$ 1 , 000
$ 2 , 000
$ 3 , 000
$ 4 , 000
$ 5 , 000
$ 6 , 000
$ 7 , 000
$ 8 , 000
$ 9 , 000
Cas
h^ B
alan
ce
= Free CF to Equity = Cash to Stockholders Cumulated Cash
This shows the accumulation of a large cash balance at Chrysler. Starting with a
zero cash balance in 1985, I added back the difference between FCFE and
dividends each year to the cash balance. In the last few years, that difference has
led to an accumulation in cash.
This large cash balance, of course, was what triggered the attempt by Kirk
Kirkorian to take over Chrysler. While he failed, he did put sufficient pressure
on Chrysler to force them to increase dividends and buy back stock.
Note that while Chrysler has argued that it needs a large cash balance as a buffer
against the next recession, it used up only $ 0.5 billion during the 1990-91
recession.
