ime meeting shareholder expectations.Another observation is that GM looks to use more debt financing that equity financing for funding their activities. The debt to equity ratio has steadily decreased over the past five years and is higher that the industry average. Also, the current and quick ratios are much lower than the industry averages. This again can pose some problems for the firm. The disadvantages of this leveraging strategy is that GMs interest expense will increase, the firm can be exposed to interest rate risk, and the possibility that GM would not be able to meet its obligations during poor economic conditions. The advantages of debt financing are that: bond investors are generally willing to accept a lower rate of return as compared to equity investors, the debt interest is tax deductible, and bond investors do not have voting rights on company issues. (Anthony 243) General Motors times interest earned ratio has generally stayed on course except for 1998. This shows that GM needs strong sales volumes to pay its on its liabilities due to the low profit margin. If a long-term decline in worldwide auto sales occurs, GM may have difficulty paying on its debt. In February 1998, GM announced a four billion dollar stock buyback program to decrease the number of outstanding shares and lower the amount of dividend payments. This corporate action was completed in December 1999 and they used over 2.6 billion dollars in cash to finalize the program in 1999.(GM 1999 77) This action shows that GM is committed to primarily issuing new debt to finance any capital needs. The one benefit of this action is the amount of dividends that GM will have to pay out to the current shareholders. In 1998, GM had to pay out 47% of its earnings to keep its fixed dividend policy of $2.00 for the year. When companies are paying out that much of earnings that can have a negative effect on product development and corporate expansion in the yea...
